Weekly Summary: The Fed Loses Control of Inflation

The S&P 500 index lost 0.7% this week despite earlier gains of 2% in the first half of the week. Strong macroeconomic data and a slower-than-expected decline of inflation prompted some Federal Reserve (Fed) members to propose a 50-basis point interest rate hike during the next Fed meeting in March. Investors were expecting the monetary watchdog to raise interest rates by 25 points.

However, the next meeting will be held on March 21-22, leaving plenty of room for the market landscape dramatically change. So, this suggestion may not become a reality by that time.

So far, the U.S. stock market has been surfing on its highs, giving no opportunities for other markets to ride the disinflation wave. Strong macroeconomic data supports monetary tightening actions as the Consumer Price Index in January slowed down to 6.4% vs expectations of 6.2% and 6.5% in December. Retail sales posted a two-year record of gains that came out at 3.0%, beating the forecast at 1.8%. Inflation fears were amplified by the Producer Price Index that surged by 6.0% year-on-year in January against the expected 5.4%. All this is a direct indication that the Fed’s efforts to control inflation are rather weak. The strength of the American economy may lead to another wave of inflation this spring, and larger interest rate hikes may not be timely. The Fed may try to scare consumers with extremely hawkish rhetoric, and to lower inflation expectations by raising interest rates by 50 basis-points in March.

Federal Reserve’s Bank of St. Louis President James Bullard and Cleveland Fed President Loretta Mester have already said that a half-percentage interest rate hike might be needed to cool inflation. Nevertheless, both have no voting rights in the Federal Open Market Committee (FOMC) this year. So, voices of those FOMC members that have these rights are needed.

Technically, the S&P 500 index continues within the upside formation with primary target at 4100-4200 points that has already met. The index is now resting at the support level of 4040-4060 points. So, the index may rebound to 4180-4200 points, or continue to drop to 3930-3960 points to form a downside formation with targets at 3750-3850 points.

Brent crude prices hit the resistance at $87-89 per barrel after Russia’s energy minister, Alexander Novak, said the country is going to cut crude production by 500,000 barrels per day, and rolled back towards the support at $77-79 per barrel. Uncertainty and volatility are rising and in light of this situation, it is better to wait before prices break out of the wide range of $79-89 per barrel in either direction. Recession logic suggests that prices are likely to go down.

Gold prices are moving inside the mid-term, upside formation with targets at $2000-2100 per troy ounce by the middle of 2023. Prices have fallen below $1880-1900 per ounce, increasing chances of a further downfall to the support level of $1790-1810 per ounce. Odd price growth over the last weeks may point to a possible change of trend to the downside during elevated volatility to rewrite last year’s lows.

The money market has ignored any upside signals for the American currency in January, making the Dollar oversold against other currencies. So, the Dollar is gaining momentum and may continue to strengthen further. Considering the high volatility in the market, it is better to place orders that are attached to longer perspectives. Short trades for EURUSD opened at 1.06700-1.07200 with a downside target at 5000 points below the opening level and the same 5000 points for a stop-loss order should be considered very attractive. However, the decline of the EURUSD to 1.05000-1.05500 could be used to close half of the trade, and reopen it when the pair rebounds to 1.06500-1.07000.