Too sticky to cut

Uh oh... Yesterday’s inflation update from the US didn’t go well. January data showed a hotter-than-expected report across monthly and annual readings and all categories including food, energy and housing. In numbers, the US headline inflation accelerated to 3%, instead of decelerating to the Federal Reserve’s (Fed) 2% target. Core inflation – the one that excludes food and energy and that matters more to the Fed under the pretext of being less volatile – ticked up to 3.3%, and Fed Chair Jerome Powell said in the second day of his semiannual testimony – and following the CPI release – that they ‘were close but not there on inflation’. ‘Close’? Not so much: inflation sticks around the 3% mark since summer, and will hardly point its nose to the 2% target with Trump’s tax cuts and tariffs.

PS: US federal budget gap widened to a record for the first third of the fiscal year, and the cumulative deficit for October through January widened 25% (Bloomberg).

As such, the Fed rate cut expectations melted like snow under the sun after yesterday’s clear uptick in US inflation suggested that the Fed would better wait and see before doing anything else. The US 2-year yield – that best captures the Fed expectations – jumped almost 10bp yesterday and the US 10-year yield – which will serve to control the borrowing costs under the new treasurer Bessent jumped around 12bp. Activity on Fed funds futures suggests that the Fed is not ready to announce its next rate cut before the September meeting – gradually kicked down the road from May at the start of the year. And worse, swap traders don’t expect the Fed to cut the rates before December – and hence cut just one more time this year, if it cuts at all. The Fed’s next move could be a rate hike – instead. It all depends on how Trump’s tariffs will hit back the US consumer.

Gold gained despite the rising US yields and the historically negative relationship between US yields and gold prices is no longer a thing – given that big buyers including central banks – flee the US debt and replace it with gold. As such, yes, I think that hitting the $3000 per ounce level in gold could trigger some profit taking and a tactical short opportunity, but the medium to long-term outlook for gold remains positive. If Bitcoin could rally to $100K, gold could well continue its journey toward – I don’t know - $4000 per ounce?!

In the FX, the US dollar didn’t rise on the back of rising hawkish Fed expectations and rising yields. But the greenback is swiftly offered in the Asian session – maybe due to some relief on hopes of an eventual—if imperfect—resolution in Ukraine. Crude prices plunged 2.70% below the 100-DMA yesterday and are extending losses toward the $70pb psychological support this morning. Potentially waning geopolitical risks on the Russian front, the melting Fed cut expectations and the tariff unknown gather dark clouds over the global economic outlook and could encourage a dive in US crude prices below that level and pressure the price of a barrel of Brent crude toward the $70pb level, as well.

Elsewhere, the dollar’s weakness despite the hot CPI read encourages other currencies to recover some of the latest losses. The EURUSD for example jumped past the 50-DMA and is preparing to test a minor Fibonacci resistance. But the medium-term outlook for the EURUSD remains bearish below the 1.06 mark, and macro traders are probably looking for interesting top selling opportunities on the back of diverging Fed and European Central Bank (ECB) policy outlooks. Today, the US PPI and weekly jobs figures could give reason to the USD bulls to pile back in.

In equities, the S&P500 sure kicked off yesterday’s session on a negative note but the index recovered losses throughout the session and ended the day with a meagre 0.27% slide, while Nasdaq 100 managed to eke out a 0.12% advance. The rally in US equities somehow slowed by underwhelming earnings from the Magnificent 7 companies, but the rest of the index is doing pretty well. Around three quarters of the companies in the S&P500 already reported their earnings and the earnings per share grew 12.5% in Q4 compared to a 7% rise expected into this earnings season. But the earnings beat resulted in a meagre average performance of -0.1%. What does that mean? It means that the rotation trade won’t be enough to offset a potential fallout if - God forbid - the Big Tech companies were to fall from grace.