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  • Spot silver prices have recovered back to around $26.00 in recent trade following soft US inflation data.
  • The data seemed to have eased fears that the US economy will overheat and prompt an early Fed tightening response.

Spot silver prices (XAG/USD) have seen upside in recent trade, rallying from around the $25.75 area to current levels around the $26.00 level in wake of a softer than expected US Consumer Price Inflation report for the month of February. XAG/USD bulls are now eyeing a test of Tuesday’s highs at just above $26.10, which seems likely if the US dollar continues to crater – note that spot silver has traded mostly as a function of USD on Wednesday and its recent recovery back above $26.00 from lows in the $25.50s in XAG/USD coincides with weakness in the Dollar Index (DXY) that has seen it drop from session highs above 92.20 to current levels around 91.80. At present, the precious metal trades with gains of about 0.5% or just under 15 cents on the day.

US CPI report and market reaction

Headline Consumer Price Inflation (CPI) in the US in the month of February came in at 1.7% on a YoY basis, according to the latest BLS report, in line with market expectations and an increase of January’s YoY rate of inflation of 1.4%. On a MoM basis, the CPI rose 0.4%, also in line with consensus market forecasts. However, according to the BLS report, Core CPI was softer than expected, with the YoY rate coming in at 1.3% (versus market expectations for 1.4%) and the MoM rate coming in at 0.1% (versus market expectations for 0.2%).

The increase in the headline rate of CPI was driven by a 7% MoM increase in gasoline prices in the month of February. Meanwhile, the Core measure of CPI was weighed by weakness in used vehicle, prescription drug and travel-sensitive sectors. Capital Economics find continues weakness in core prices “hard to square with the recent recovery in demand” and think that “with the high-frequency data showing that restaurant dining and air travel are now rebounding rapidly, it’s surely only a matter of time before prices in those most-affected services sectors start to pick up”. The economic consultancy concludes that “with the imminent fiscal stimulus set to turbo-charge demand, at a time when many sectors are already facing severe supply constraints, and with a variety of survey indicators pointing to rising price pressures, we still think inflation will rebound rapidly over the coming months”.

In terms of the market reaction; stocks and precious metals have rallied in wake of the data, while US government bond yields and the US dollar have dropped. Such a reaction is indicative of the fact that the CPI report must have eased fears of the US economy “overheating” in the coming months/years, something which is feared would lead to an earlier than anticipated Fed monetary policy tightening response. Given that expectations for Fed tightening are typically associated with lower stock, precious metal and bond prices (meaning higher bond yields) and a stronger dollar, the fact that Wednesday’s CPI report has eased these fears means an opposite reaction.