Is January’s US CPI disappointing?
Asian stocks extended their rally and the European Stoxx 600 is up for the fourth consecutive session. US futures, however, are trading lower ahead of the January CPI figure. Benchmark 10-year bond yields are generally firmer, with the US 10-year hovering around 1.95%. European yields are 2 to 4 basis points higher and peripheral-core spreads are widening a little. The dovish stance of Sweden’s Riksbank causes the krona to join the lagging yen today, which saw most major emerging market currencies climb. The JP Morgan Emerging Market Currency Index posted small gains for the fourth consecutive session. Gold hit a new marginal high for the month but encountered sellers around $1836, pushing it back towards $1830. The unexpected drop in U.S. oil inventories (4.75 million barrels, the biggest drop since last September) had helped March WTI regain the $90 handle after a brief period of profit taking. US natural gas prices are the most stable, while the European benchmark was a bit weaker. Copper is up for a second day, while iron ore jumped more than 5% after yesterday’s 1.75% loss snapped a six-day lead.
The BOJ has decided to defend its policy of controlling the yield curve. The 10-year JGB yield moved closer to the 0.25% cap as the market tested the central bank’s resolve. The BOJ announced on Monday that it would be an unlimited number of 10-year bonds at a fixed rate of 0.25%. Japanese markets are closed for a public holiday tomorrow. This is the first such operation in 3.5 years.
With today’s purchases, the Reserve Bank of Australia has completed its QE. It holds about 40% of the public debt, or about 650 billion Australian dollars. Last year, the RBA bought about three times as many bonds as the government issued. Sequentially, the next question is what to do with the maturing product, and Governor Lowe has said a decision will be made in May. The Bloomberg survey reveals that most economists expect a rise in August, while the swap market sees the rise a little earlier.
China’s global loans hit record highs last month of 6.17 trillion yuan. Loans in January generally increase in January as new quotas are exploited. However, the increase was much larger than expected. Bank lending was strong (3.98 trillion yuan), but so was shadow banking (the difference between bank lending and overall funding). Yet, this just seems to confirm what has already been reported, that officials have shifted their stance to support the economy.
The US Dollar came closest to JPY116.00 in a month. The peak was reached during the brief overlap of later Asia with early European activities. There is a $750 million option that expires tomorrow at 115.75 JPY. Support is seen a little lower near 115.50 JPY. The Australian dollar is pushed towards $0.7200, a level it has not exceeded since January 21. Above we are looking for $0.7230. The Aussie looks well supported, with over A$1 billion worth of options expiring today between $0.7150 and $0.7155, although intraday momentum indicators are stretched. The PBOC pegged the dollar benchmark rate on the median forecast from the Bloomberg survey at CNY 6.3599. The Dollar hit a new marginal low for the week (slightly below CNY 6.3540). Note that India and Indonesia kept their key rates stable.
The European Commission today published new economic forecasts. Although it has raised its CPI forecast this year and next year, its rate is still below 2% next year. This year’s projection has been raised to 3.5% from the 2.2% forecast made last November. Inflation next year now looks to be 1.7% rather than 1.4%. Pricing pressures are expected to peak at just under 5% this quarter (4.8%) and remain above 3% until Q4, when they drop to 2.1%. The EC cut its growth forecast for this year to 4.0% from 4.3%, but postponed it to 2023 by raising its forecast from 0.3% to 2.7%. The real interest lies in the ECB’s forecast in March, and some see the EC’s forecast as a hint of what the central bank’s update might look like.
The Swedish Riksbank left its policy unchanged, as widely expected. He now sees H2 ’24 rather than Q4 ’24. The swap market is less optimistic and expects a tightening of around 70 basis points over the next 12 months. There were three dissenters on its bond purchases and advocated a steeper cut. Governor Olsen cast the deciding vote to continue his QE. With upward revisions to the Riksbank’s CPI forecast, the move appears to be a dovish move. This year’s CPI forecast was raised to 2.9% from 2.3%. The CPI projection for next year has been changed to 2.0% from 1.9% and 2024 to 2.4% from 2.2%. The Swedish krona is now the weakest of the major currencies, down around 0.65% against the dollar and 0.75% against the euro.
The Euro remains within Tuesday’s range, around $1.1395-1.1450. It sits near the upper end of the range in the European morning. It is unlikely to make much headway against the US CPI numbers. The $1.1500 level is the important cap, and it appears to be protected by two large option expiries, with a €1.76 billion option today and a €1.9 billion option tomorrow. Initial support is seen at the $1.1420-1.1430 area. For its part, the pound sterling continues to dip between $1.35 and $1.36. It hit the session high near $1.3580 in early European trading and hit a wall of sellers. Nearby support is seen at $1.3540 and then $1.3520. The UK reports fourth quarter GDP and details for December tomorrow.
Today’s January US CPI may be a little disappointing. Almost everyone expects a small acceleration to 7.2-7.3% from 7.0% at the end of last year. The market has fully discounted a 25 basis point move next month and has about a 30% chance of a 50 basis point move. Still, it may be close to a peak, and at least one Fed official (Bostic) has said so. Recall that last year the CPI jumped from March to August. As they move out of the 12-month comparison, the year-over-year rate will likely decrease.
Mexico reported January CPI slightly higher than expected yesterday, and it reinforced expectations of a 50 basis point hike today that would take the target overnight rate to 6.0%. This is the first meeting with the new governor, Victoria Rodrigues Ceja, at the helm. Some observers expressed concerns that she had not been tested and was likely accommodating. A 50 basis point hike in its first meeting, especially given that the economy contracted in Q3 21 and Q4 21 (a simple rule of thumb for a recession), would underline the anti-inflation credentials of the central bank.
Yesterday, Bank of Canada Governor Macklem issued a hawkish note, warning that the key rate may need to move above neutral (2.25%) in order to cope with price pressures. The swaps market stopped just before (almost 2% in 12 months and 2.25% in 24 months). Canada is releasing the January CPI next week. It stood at 4.8% in December.
The US Dollar continues to hold strong support in the CAD1.2650-1.2660 area. There are options for $700 million which expire today at 1.2670 CAD. Tomorrow, the optionality is stronger. Options for nearly $4.5 billion entered between 1.2650 and 1.2660 CAD expire. Tomorrow there is also another option for CAD 1.22 billion at CAD 1.2685. Before the Banxico meeting, the peso is bid up. The greenback is near its three-week low against the peso at around 20.42-20.43 MXN. A breakout sets up a test on the 200-day moving average near 20.33 MXN. Last month’s low was near MXN20.28. Still, the North American session could be more cautious. A rebound could push the dollar higher towards 20.50 MXN.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.