Watch out for US inflation!

Last week, concerns about the recession were on the agenda again. The reason was that the roots coming from the global scale, especially from the USA, pointed to the slowdown of the economies. Manufacturing PMI in both the US and the Eurozone on Monday remained below 50 and expectations. The JOLTS data, which is important for the FED, from the USA on Tuesday decreased by 9.9 million Citadel for the first time since May 2021. The decline in this data also made a significant contribution to the "less aggressive FED" pricing, as it saw a relief in its fee. The fact that ADP private sector non-farm employment, which also came from the USA on Wednesday, was below expectations and the weekly pension applications on Thursday also came above expectations, added to the pricing that the "power officers in the USA are getting cold". Along with all these principles, the fact that the US ISM service PMI data was below expectations and very close to the 50 limit in the last week further exacerbated the recession concerns in the country. In fact, the lower breakdown of the ISM service survey and the 10-point decline in the ISM service new order institution compared to the previous month further demoralized them.

With all these data, while the dollar index had regressed to 101.1 until Thursday, we saw a decrease in the US 10-year and 2-year bond yields to September 2022 levels. The interesting thing is that although bond yields in the USA fell, indices also sold. I can say that the reason for this situation is that the indices in the USA have not priced the recession sufficiently. The main reason why the recession was not priced sufficiently is that it is not known exactly how deep it will go. When the possibility of a recession after the banking crisis became stronger, the indices started pricing in a recession in panic, along with the bad economic data. It should not be forgotten that, especially after the banking crisis, the increase in demand for safe-haven technology shares, which is the sector farthest from the banking sector, draws attention. Therefore, I can say that Nasdaq is positively differentiated from Dow Jones and SPX in this sense. Recently, we have witnessed that both the positive developments in the semiconductor index and the news feeds about the use of artificial intelligence by technology companies also support the technology stocks and the Nasdaq.

Although many markets abroad were closed on Friday for the Easter holiday, the nonfarm payrolls report from the US would be important. According to the report, non-farm employment came in at 236,000, slightly below expectations (the expectation was 239 thousand), while unemployment dropped to 3.5% by surprise (the expectation was 3.6%). While the labor force participation rate has increased, this decline in the unemployment rate is a clear indication that the US economy is still capable of creating jobs. As a matter of fact, even this part of the report points to a tight labor market, despite the decline in non-farm employment. Average hourly revenues, reflecting annual wage increases, were up 4.2% (vs. 4.3% expected), while monthly wage increases were up 0.3% (from 0.2% last month), in line with expectations and slightly higher than last month. According to these figures, there will be a steady decline in annual wage growth in the first quarter of 2023. But levels are still high in the fight against inflation. Therefore, the general message of the non-farm employment report is that the labor market is quite tight, although there are signs of cooling in the labor market. In particular, the service sector, which the FED is uncomfortable with, continues to generate strong employment. In short, the US job market is finally slowing down but is still strong.

As the markets were closed on Friday, we could not see the full reaction to the TDI data. In the new week, we are likely to see pressure on the precious metals side with the "more aggressive FED" pricing and the rise in the dollar index and bond yields. On the swap side, the probability of 25 basis points coming from 52% before the TDI report seems to have increased to 71% on Sunday, when this article was written. As it can be understood from here, the market is pricing the TDI data as "the tight labor market continues, so the FED needs to be more aggressive". According to the latest situation, the market is pricing the ceiling interest rate to reach 5.00%–5.25% with the last 25 bps increase in May and that the FED will cut the interest rate by 75 bps for the rest of the year, lowering the interest level to 4.25%–4.50% for the end of the year.

Interest Rate Probabilities for FED's May FOMC Meeting

Source: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

This week will be quite critical as the US March inflation figures will be released on Wednesday, April 12. According to expectations, headline inflation is expected to recede from 6% to 5.2% on an annual basis, while core inflation is expected to increase from 5.5% to 5.6% on an annual basis. On a monthly basis, the headline CPI is expected to rise 0.3% (0.4% last month) and the core 0.4% (0.5% last month). If the realizations happen like this, although the core is expected to increase annually, I think it is likely to strengthen the perception that "inflation is declining in the USA". As a matter of fact, the lower the inflation rate on Wednesday, the stronger the bounce, especially below, can be. If we see an inflationary trend that is stronger than expected, it may even be possible for an ounce of gold to reach its historical peak in 2070. On the contrary, if inflation rises contrary to expectations or shows strong signs of permanence, I think it is possible that we will see a correction toward 1980 dollars on the gold ounce side this time. The lower (or higher) inflation, the better (or worse) news for indices. In addition, since DXY and treasury bond yields have decreased more than necessary in recent days, strong rises in both DXY and yields may be on the agenda if inflation is higher than expected.