Week 11 2024 - Review
Still high inflation readings but not fading away rate cuts
With overall inflation data readings increasing for March, the rate cuts narrative wasn’t shaken as we saw pullbacks on Gold and Dollar taking action and rate cut probabilities for June still intact. Typical BoJ news headlines coming out before the decision to shake Yen pairs with more rumors of end negative IR.
With the week marked out by Inflation Readings on CPI and PPI, the FED blackout period before FOMC decision next Wednesday took out any “Fed parrots” from the schedule.
With Monday pretty quiet in terms of economic events, eyes were on CPI on Tuesday. Our expectations, according to our weekly preview, were to CPI decrease or even to stay as-is as other contributor factors were suggesting a slight decrease. Although, we were wrong and in fact increase on energy index, which personally was not expecting at all, made CPI MoM and YoY to increase by 0.1%. Core CPI was reduced on YoY also by 0.1% and kept the MoM.
According to BLS, the increase of inflation data was relative to the increase of the energy index.
As we can see above within the red square the energy component suffered a sharp increase in all its sub-components, and came from -0.9% to 2.3%. Energy is one of the biggest contributors for final inflation readings and oscillations here can easily affect the final readings.
With such data, PPI on Thursday was also expected to increase and it doubled from 0.3% to 0.6% as it suffered also with the increase of energy index. According to BLS:
Nearly 70 percent of the broad-based rise in February can be attributed to the index for final demand energy, which jumped 4.4 percent
Source Bureau Labor of Statistics
Beside such reading, we also had Retail Sales that came below expectations but within its normal range. With almost all of economic data reported, we only waited for Industrial Production on Friday that came quite optimistic at 0.1% as the previous was revised from -0.1% to -0.5%. Then preliminary UoM Consumer Sentiment came below expectations at 76.5 that in terms of market sentiment nothing changed.
Looking at the charts, we can see that beside the high readings of CPI could support fading the rate cut narrative, technically on Gold and Dollar we are able to assess the fact that such results didn’t change investors wavelength allowing markets to enter on secondary stage of market structure.
Continuing with the chart we shared on our weekly preview, we marked out potential buying areas at 2160s and 2150s that depending on the CPI results we could see Gold bouncing. In fact Gold wasn’t able to break the 2150 demand area, did not broke it’s bullish market structure and since CPI, Gold ranged on intraday timeframe between the 2150s and 2175s. In order to see rate cuts fading we should have seen gold breaking well below the 2150s heading into 2120s and 2080s for such corrective structure. Instead, we printed new ATHs last week and we kept consolidating at ATHs, suggesting the economists and investors are waiting for the next week being the major CB decision week.
Adding on the previous technical analysis, also on CME probabilities, such results did not change much on the first rate cut being in June, beside now we see that markets are pricing in only 3 rate cuts until the end of year.
On Dollar side, we marked out potential supply zones where we could see dollar react.
As we can see above (we expanded a bit the time interval) Dollar since mid February is forming this bearish market structure and beside it did not respect the areas we marked out, so far, did not broke the last one, even with such upside move during PPI release and the reactive headline from Japan, which for us is the most important one because this also tell us, as confluence with Gold, that technically by not breaking the 103.6/8s area doesn’t also break the structure, so our view is that we are still in a pullback stage before continuing more bearish.
Of course that with the information we have now and just looking into the fundamentals in play and also the technical perspective that is our conclusion, but of course, next week with the major CB decision and speeches such can change.
In summary the week was pretty low in terms of volume and volatility as we were expecting a bit more from Gold due to recent moves and the importance of the inflation data on the CB policy positioning. As we can see below, the weekly volume was well reduced in comparison from the previous weeks.
We must not finish our post without a special note on Yen pairs due to potential shifts of Monetary Policy. We need to apologize our readers that we forgot to mention, on our weekly preview that more times than not, before the markets close at the end of the week whenever there is a BoJ rate decision on the week after, is very common to see some “leaks” or “headlines” in regards of BoJ positioning. This week it was no exception and on Thursday we had headlines from Japanese press JIJI.
The Bank of Japan has started to make arrangements to end its negative interest rate policy at the March 18-19 meeting, Jiji news agency reported on Thursday
Source - Reuters
Rumors that such type of reactive headlines that comes days before the decision are sent in purpose from BoJ to the media for market reaction before the event. However it doesn’t mean that the headline is what BoJ will do, but no matter what markets react and price it in. This reactive headline, came out at the same time of PPI release and the “buy the rumors, sell the news” type of play made Yen to be bearish as such have been priced in since early March.
As we can see above this last upside move on Yen (JXY) from barely ATLs, matching the downside move of USDJPY, were the effects of Kuroda comments on potential shifts and with the reactive headline where potentially could create even more upside on Yen, it turns bearish and closed the week almost correcting 50% of such upside and being ready for the big decision day.
Not much to add on for the week and now it’s time to reset, refresh and prepare for the CB decision week to come which can be very interesting.
Stay safe, refresh and reset and hope you can have a great weekend.