Precious metals reacted to higher than expected inflation data. Crude oil affected by EU ban and Covid situation in China.
Released US inflation data from Wednesday were higher than expected. The most monitored data, Core inflation rate MoM, were 0.2% above expectation. Current month over month core inflation rate in US is 0.6%. Markets carefully watched these numbers, because of tight connection with possible future steps of Fed. Means, higher month over month inflation digit shows, that actual steps are not enough to fight with rising inflation in US. Therefore more interest rate hiking is expected in next few months.
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Higher inflation = higher interest rates
Formula higher inflation = higher interest rates is working, obviously.
“If the economy performs about as expected,” Powell said, “it would be appropriate for there to be additional 50-basis point increases at the next two meetings”, Bloomberg informed.
Markets are afraid of more aggressive hiking about 75 bp, but this option is as Powell said “unlikely”.
Source: Al Drago/Bloomberg
At the beginning of the week we have informed, that no interest commodities as precious metals could react negatively on higher inflation. In the time of writing this article gold has depreciated this week -3.19% and silver about -6.71%. This numbers underlined impact of connection between inflation and interest rates on non interest financial assets. In addition, we can clearly see positive correlation between these two precious metals.
Weekly development of Gold (GC), Silver (SI) and Crude oil (CL) in %. Source: tradingview.com
Russian oil ban and lockdowns in China
Oil is a different story from gold and silver, because it is affected by different fundamentals. We can not stated that inflation has no impact on crude oil price, but the main movers of this week are different from metals. From the start of the week, oil felt from open more than 11%. But the price jumped back in the second half of the week more than 10%.
30 minutes chart of CL (Crude oil futures), Weekly volatility. Source: tradingview.com
This turbulence on oil prices could be caused, predominantly, by two main factors. First one is situation about EU ban on Russian oil imports. EU nations are eager to ban imports, but talks are disrupted by Hungary, which is not able to agree with the rest of nations. And every statement from these talks has significant impact on oil’s price move.
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Second factor is Covid situation in China, where government is fighting with virus by strict lockdowns. Moreover, these lockdowns hurts the economy by disrupting world supply chain. Uncertainty about how China will continue to fight with virus impacts the price of crude oil. Moreover, the fear is rising with the possibility of China’s capital lockdown. Government denies this rumors, but the fear is here, and brings the turbulence to the markets.