Gold shined last week while Bitcoin and U.S equities searched for direction due to higher oil prices and concerns over inflationary pressures ahead of new inflation data, ECB decision, and bank earnings.
The yellow metal gained 3.9% for the week to close at a new high of $2349.10, up close to 16% year over year.
Bitcoin descended towards the $65,000 mark early in the week before heading back towards the $70,000 towards the end.
Equities ended the week lower despite rallying on Friday. The S&P 500 ended the week at 5,204.18, down 0.70%; the Dow Jones was 38,904.04, down 1.6%; the tech-heavy Nasdaq was 16,248.52, down 0.90%; and the small-cap Russell 2000 was 2,063.47, down 1.70%.
One catalyst behind Wall Street’s heightened volatility during the week was higher oil prices, growing Middle East tensions, and more robust economic data from China early in the week.
The black gold, or crude oil, was up 3.1% for the week and 23.49% for the year, reviving fears of another round of high headline inflation numbers.
Another catalyst was strong economic data for the world’s largest economy released during the week, such as the turnaround of the leading economic indicators and the manufacturing PMI, rising inventories, and a warm jobs data for the month of March.
A more robust U.S. economy added to Wall Street’s fears that inflation would stay elevated for much longer, forcing the nation’s central government to keep interest rates high for the rest of the year.
These fears were confirmed by comments by Fed officials during the week, suggesting that interest rate cuts could be off the table this year if inflation heads in the wrong direction.
On Thursday, for instance, Minneapolis Federal Reserve Bank President Neel Kashkari suggested that there may be no interest cuts this year if inflation remains elevated and the economy stays strong.
“If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all,” Kashkari said during an interview with Pensions & Investments, which Reuters quoted. “There’s much momentum in the economy right now.”
In addition, he didn’t rule out the possibility of interest rate hikes if inflation heads higher again.
That means the Fed Funds rate benchmark short-term rate, currently set in the 5.25-5.50% range, could remain there for much longer than expected and may even get higher if inflation heads north again.
Bond traders and investors didn’t like this prospect. A higher Fed Funds rate could drive money market rates higher, drawing funds away from the long end of the yield curve. Thus, the sell-off in Treasury bonds on Thursday afternoon, with the benchmark 10-year Treasury bond yield touching 4.4%.
The sell-off spread over in stocks in a nasty reversal whereby all major equity indexes gave up early gains, ending the trading session with hefty losses.
In the coming week, Wall Street will receive fresh data on inflation as the government releases three measures of price changes across the economy: Consumer Inflation Expectations, the Consumer Price Index, and the Producer Price Index.
Any surprise here could add to volatility in both debt and equity markets.
In addition, bond and stock traders will look for clues on the direction of European interest rates on Thursday when the European Central Bank (ECB) releases its monetary policy statement after its regular meeting. The ECB is expected to keep its key policy rate unchanged at 4%, but the statement may provide some hints as to how soon and how much it will cut it this year.
In a Bloomberg interview last weekend, Greek central bank chairman and ECB Governing Council member Yiannis Stournaras floated the possibility of four interest rate cuts this year. The Eurozone’s economic growth and inflation are roughly half the corresponding U.S numbers. Thus, the ECB is in a better position to cut interest rates to stimulate its economy without reviving inflation.
Meanwhile, on Friday, equity traders and investors will get a glimpse of the earnings situation of the listed companies when big banks like JP-Morgan Chase, Wells Fargo, and Citigroup report first-quarter earnings before the bell.
Any surprises from the ECB or on the earnings front could send equities on another wild ride.
