It’s All About Inflation – Daily Market Brief, May 11, 2022

After a mixed close on Wall Street, European bourses are heading for a firmer open, adding to gains from the previous session.

·         German inflation confirms the preliminary 7.4% YoY print, EUR/USD trades above 1.05

·         China CPI rises ahead of forecasts to 2.1% YoY, AUD/USD rises from the 2022 low

·         US CPI is set to increase 8.1% YoY, the first slowdown in inflation since August 2021

Inflation has been a critical theme for the markets since the end of last year, and the focus on consumer prices has been exasperated since the start of the Russian war as oil and food prices surged. Today the emphasis on inflation intensifies with CPI releases from China, Germany, and the US, with investors key to see if signs of inflation easing are starting to emerge?

German CPI

German CPI confirmed the 7.4% YoY preliminary reading, up from 7.3% in March. The record high level of inflation comes as the Bundesbank continues to push for an interest hike from the ECB, which is still tapering bond purchases and remains one of the least hawkish major central banks. However, momentum could be building at the ECB for a July interest rate hike. Attention will now shift to ECB president Christine Lagarde, who is due to speak later today to see whether the tide is turning at the central bank.

The DAX points to a 0.4% rise on the open after gains of 1.1% yesterday. Bulls will be looking to push the DAX towards the key 14000 psychological level.

EUR/USD continues to trade in a relatively tight range, capped by 1.0470 on the lower band and 1.0640. Today’s US CPI data could spark a breakout.

China CPI

Chinese CPI came in higher than expected at 2.1% YoY in April, up from 1.6% in March and above the 1.8% forecast. Inflation jumped as ongoing COVID lockdowns caused supply chain disruptions, adding to inflationary pressure and global commodity prices surged in the fallout from the Russia-Ukraine war. PPI also came in above forecasts at 8%, but this was a touch lower than the 8.3% recorded in March.

China is showing no signs of easing its strict zero-COVID policy despite its economic impact and the World Health Organisation pushing for the easing of the rigid policy.

AUD/USD has risen from the 2022 low of 0.6910 and has crossed above 0.6950, supported by the weaker USD and upbeat equity markets. US CPI will be the next catalyst for the pair.

US CPI

US  CPI is expected to show that inflation continued to rise in April but at a slower pace. CPI is forecast at 8.1% YoY in April, down from 8.5% in March. While this would mean that inflation remains close to its 40-year high, it would also mark the first slowdown in inflation since August last year. Meanwhile, core inflation is expected to rise 6% YoY in April, also down from the 6.5% recorded in March.  

Regardless of today’s figure, it is unlikely to knock the Federal Reserve off its course with a 50-basis point rate hike expected in June. Federal Reserve Chair Jerome Powell has been clear that US inflation is too hot. Cleveland Fed President Loretta Mester suggested that a 75 basis point hike could still be a possibility in upcoming meetings.

Still, cooling inflation could raise optimism that peak inflation has passed, and ease bets of a more aggressive Fed, pulling the USD lower while lifting stocks, particularly the high growth tech stocks, which took a hammering last week.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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