How the Market Responds to the US CPI May Set the Short-Term Path

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US stocks leaned on the rally that started on Monday, and allowing the balance sheet to contract later this year dampened some speculation about a fourth rise this year, which appeared to allow the treasury market to stabilize; which amounted to a greater appetite for risk which is now reflected in activity in Asia-Pacific.

Most of the major exchanges rose more than 1%, rising nearly 2.8% and rising as well. Bond yields mostly fell 2-4 bps in the region, but higher (3.8% vs. 3.1%) were down six basis points.

Europe opened higher but stalled as US futures recovered from their initial weakness to rise. European yields were down around 2-2.5bp. was underperforming as the new supply seemed to weigh on prices. The United States was hovering around 1.74%.

was little changed against most major currencies. Norway cited a stronger continent (+ 0.7% in November after a stable rate in October) highlighted the likelihood that Norges Bank would raise rates at next week’s meeting, and increased by nearly 0.6%. The, which appeared to break higher yesterday, extended the gains today. Likewise, most emerging market currencies were +/- 0.15%, but the (~ + 0.35%) and (~ + 0.3%) were the main exceptions.

Regarding raw materials, yesterday’s 1.1% advance was reduced, yielding nearly a quarter. Energy prices were firm. February extended yesterday’s gains. It was approaching last year’s high set in late October at close to $ 82.15. the prices were also higher. US prices were up for the fourth session amid a cold snap. Today’s gains have taken the gain since the start of the year to around 18%, down from almost a quarter since the start of the year. Flooding at Brazilian mines recently bolstered the industrial metal, which was at a new three-month high today. prices rose about 1.7% for the second consecutive session. They fell 1.2% last week.

Asia Pacific

China’s December CPI and PPI were weaker than expected, while overall lending numbers were in line with expectations. Helped by falling prices for food and non-food items, as well as services, in part due to lockdowns, fell to 1.5% from 1.7%. Excluding food and energy, the basic measure remained unchanged at 1.2%.

The government has taken measures to facilitate the supply of raw materials. Idle to 10.3% from 12.9%. The median forecast for the Bloomberg survey was 11.3%. Global funding slowed to CNY 2.37 trillion from CNY 2.61 trillion in November. Economists have projected CNY 2.4 trillion.

The slowdown was almost evenly distributed between banks and shadow banking. The PBOC still had to relax its policy ahead of the Lunar New Year holiday which begins on January 31. While some sought another reduction in reserves, a small reduction in the one-year medium-term loan facility next week was also a possibility.

Ahead of next week’s meeting, the BOJ raised its economic assessment of all regions of the country for the first time in more than eight years. Mitigation of the pandemic has been the main driver. The outlook for consumer spending has also improved, although wage growth has remained stingy.

Separately, Japan reported that November narrowed to nearly JPY 900 billion from JPY 1.18 trillion. November’s balance was consistently lower than October’s, but it held up better than expected. The median forecast (Bloomberg survey) predicted a surplus slightly below JPY 600 billion. Even though the trade deficit was lower than expected at around JPY431 billion, its slide into deficit after the surplus of nearly JPY167 in October explained the deterioration. The data also showed that Japanese investors were sellers of US, Australian, German and French sovereign bonds, but buyers of Canadian, Italian and UK paper.

The dollar remained within the range set on Monday against the (~ JPY115.05-JPY115.85). In fact, it was confined to less than a quarter of a yen below 115.45 JPY. There was an option at JPY 115.50 for almost $ 640 million which expired today.

Price closed above $ 0.7200 yesterday and edged up today (to near $ 0.7225), but the market appeared to be turning the tables ahead of the US CPI report. Support was seen near $ 0.7185.

The greenback fell against the. Yesterday’s low was around CNY 6.3705, while today it stood below CNY 6.3690. Indeed, it recorded the lowest since the end of last year today (~ CNY6.3630) despite lower inflation readings. The PBOC set the benchmark dollar rate at CNY 6.3658. The median expectation (Bloomberg survey) was CNY 6.3671.

Europe

The unexpected weakness in November’s industrial production reports was not offset by the strength in output, but with seasonal adjustments, the report showed a gain of 2.3%. However, the weakness that was expected was in October. The initial gain of 1.1% has been revised down to a decrease of 1.3%. It leaves the corrected rate of working days from one year to the next at -1.5%. The median forecast (Bloomberg) was for a gain of 1.2%.

October’s 3.3% pace was reduced to 0.2%. Germany will be the first G7 country to estimate fourth-quarter GDP on Friday. Europe’s largest economy was expected to slow down sharply. After growing 1.7% quarter over quarter in the third quarter, economists expected it to slow to 0.5%. We suspected the risk was on the downside.

The market still seemed undoubtedly too relaxed in the face of the deteriorating political climate in Italy. Other reports suggest that Draghi may indeed become the next president. It would mean stepping down as Prime Minister. The League was reluctant to support Berlusconi for the presidency. Berlusconi threatened to withdraw from the coalition if he did not become president. This would advance the general election next year.

The center-left PD seemed to be neck and neck with both the League and the Brothers of Italy (right-wing and more hostile to the EU). And if Draghi were to remain prime minister, his influence could weaken, and in any event, without a political party, he would likely be replaced after elections scheduled for next year.

The test hit its high this year, slightly below $ 1.1380 in late Asia before drifting lower (~ $ 1.1355). Support was seen in the $ 1.1320 area. The single currency has not gone above $ 1.14 since mid-November, and there was a € 930 million option that expired today. With a few exceptions, the euro was trapped in the range set on November 30 (~ $ 1.1235 – $ 1.1385).

With a more hawkish Fed Russia is still on the verge of seizing another chunk of Ukraine, Italian political stability could crumble and tensions within the EU heightened (EC inflicts a fine of 1 million euros per day to Poland for violating the decisions of the European Court of Justice on judicial independence), the euro still seemed vulnerable.

In the UK, Prime Minister Johnson appeared to be fighting for his political future, but extended the rally that started last month at nearly $ 1.3165 to reach nearly $ 1.3650 today. A trendline from last July high (~ $ 1.3985 and October highs (~ $ 1.3830 – $ 1.3835) stood at around $ 1.3690. struggling to maintain its bullish momentum Almost £ 800million in options minted between $ 1.3595 and $ 1.3600 expired today.

America

Powell used his confirmation hearings to assure senators (and his wider audience) that the Fed will stand up for price stability and keep inflation from setting in. He continued to suggest that the price pressures could last until the middle of the year. This was important, even as officials ditched the “transition” feature of inflation, they pushed back a few quarters from about a year ago, when they expected price pressures to ease.

Powell didn’t provide many details on the toll, besides suggesting that it would take 2-4 meetings to sort it out. He confirmed that he will likely start to decline later this year; “earlier and faster” than the last time. The Fed Chair also introduced the possibility of speeding up tapering. The Fed has indicated that the fed funds rate will remain its primary tool, but allowing the balance sheet to contract supplanted a fourth hike this year.

Many market watchers saw two main upside risks to US inflation: wages and housing costs. Given the changes in the, some suspected that the neutral level of might be a bit higher than the Fed’s plans. However, the same kind of logic could suggest that the real neutral short-term interest rate (r *) is lower than that identified by the Fed, meaning financial conditions could tighten more than expected.

The American month of December will be in the foreground today. It is expected to reach around 7% from 6.8% in November. Many economists, but of course not all, have seen it peak shortly. The way the market reacts today can offer important insight into positioning and psychology.

Has the news ever been largely ignored? The Fed’s report, later today, will offer a glimpse of how the economy is doing in light of the Delta surge and now the Omicron Flood. The Fed’s Kashkari is speaking today. What a dove means is always contextual, and apparently in favor of two hikes this year, he’s a dove.

The US dollar broke through the 1.26 CAD level which we identified as the neckline of a potential head and shoulders pattern projecting towards CAD 1.2250. The follow-up saw the greenback’s trend lower in the European morning to below CAD 1.2544, which is the retracement (61.8%) of the rally from the late October low. The next immediate target was around CAD 1.25, where the 200-day moving average was found. Note that the lower Bollinger® Band (~ 1.2550 CAD) has been removed.

Meanwhile, the US dollar rebounded along its low against the US dollar. Yesterday’s November report disappointed, showing a decline of 0.1% rather than the 0.6% increase expected by economists (Bloomberg survey). The dollar slipped to a two-week low yesterday (~ 20.3415 MXN). Yesterday’s high was around 20.4550 MXN. If this were not removed, the greenback would record its fourth session of higher highs.

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