Risk on appetite across financial markets was triggered by a softer-than-expected US CPI reading at 7.1% Y/Y compared to the 7.3%, which was expected. The previous reading was 7.7% Y/Y. Equities rallied sharply off the back of the news but are now off the highs as investors look to the Fed meeting tomorrow. In our opinion, the lower print has confirmed a 50bp hike tomorrow, and the decline in energy price will aid in cooling price pressures. However, stock markets need to be pricing in the impact of tighter monetary policy on earnings. The rise in material prices due to a weaker dollar and China's re-opening could increase the probability of stagflation in 2023. The USD index sold off to 104 today, and cable and EURUSD continued to rally to 1.2378 and 1.0644 at the time of writing. The US 10yr bonds declined to 3.467%, with the UK and Germany at 3.278% and 1.8985%; the ECB and BOE will meet this week. Unemployment increased in the UK to 3.7%, weakening the BOE's hand slightly.
Metals prices were well bid today, except for nickel which is down 3.35% to $28,530/t. The cash to 3 months spread weakened further to $293/t contango. The deep contangos could be due to producers not wanting to hold long-term hedges and long-roll their positions. Zinc prices are still bid as futures tested resistance at $3,340/t, but futures closed off the highs at $3,318.5/t. Copper prices caught a bid as traders expect a more dovish Fed, but the terminal rate is likely to be higher. Conversely, higher metal prices will be inflationary. Copper trades at $8,478/t, and the spreads are at $46/t contango. Aluminium was well supported at $2,407/t, prompting prices to push towards $2,458.5/t. The tin spread is at $45/t backwardation as the 3-month price closed at $24,644/t.
Energy prices were bid today, with Nat Gas up 6.8%, Brent above $80/bl at $81.00/bl, and WTI trading at $76.02/bl. The weaker dollar and softer inflation outweighed fears from OPEC+ about demand next year due to an economic slowdown. The Fed tomorrow will again be key for market sentiment, but precious metals continue to gain as they slow rate hikes. Gold traded higher to $1,810.3/oz, and silver is at $23.73/oz. We expect precious metals to rally into 2023.
All price data is from 13.12.2022 as of 17:30