Inflation fears not gone yet, Fed remains calm - Market Overview

Inflation fears not gone yet, Fed remains calm  -  Market Overview

Markets started the last session of the week in correction mode, trying to shave off losses from previous days due to inflation data, which led to uncertainty about monetary policies.

Another data published yesterday, the Producer Prices Index for April, came to join this wave of price increases, showing a 0.6% rise, above the analysts’ consensus of 0.3%.

The inflation factor continues to be and could possibly be the main element that the markets will consider in the near future, at least until the new figures on inflation and employment are published next month.

Fed governors have tried to reassure the markets yet again, ruling out the possibility of an inflationary phenomenon. According to U.S.’ Central Bank, the recent rallies are due to temporary circumstances derived from the disruption caused by the pandemic crisis.

Fed has also stated that the rebound in economic growth reflected in the latest published data could suffer a setback in the coming months, so there is no need to fear an overheated economy driven by ultra-expansive monetary policies and tax aid packages. They plan to stick to their mantra of keeping interest rates low for as long as it takes until the job market recovers.

Another thing will be when they start the process of reducing asset purchases, something that could start sooner than the Fed suggests, provided the economic data remains positive.

This afternoon the U.S. Retail Sales figure for April is scheduled for publishing. An increase of 1% is expected. As it is a figure closely linked to the evolution of domestic demand, which has direct implications for inflation, an upward deviation from the expected figure could have significant consequences on market performance.

Currently, the market is trying to digest all this information, at times contradictory, starting today with corrective movements that can mean the beginning of new positions and, in other cases of profit-taking operations.

GOLD, a financial asset highly correlated to inflationary expectations, has managed to stay at the top of its price in recent days after a significant rebound following the inflation report. Technically it has been on the verge of a critical resistance level located in 1850. This level is the 0.618% Fibonacci retracement of the last bearish leg. Above this level, it could pave the way for further advances towards the 1875 area.

Another asset to consider in this scenario of inflationary expectations is COPPER, the main industrial metal. Global demand has grown exponentially and is expected to continue in the coming years. The price of this metal has a high positive correlation with the performance of the North American indices, especially the USA500.

After reaching new all-time highs, Copper is in correction mode following three consecutive days of declines. However, this result doesn’t represent any reason for alert from a technical point of view, but it could be interesting to monitor if it approaches the 4.3585 area.

Sources: Bloomberg, reuters.com.

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