The week started with a limited appetite for US stock and a fresh record for Bitcoin. Major US indices were flat on Monday’s trading session. The S&P 500 slid 0.11% as sentiment in technology stocks was mixed. Nvidia (NASDAQ:NVDA) tumbled 2% yesterday, but Google (NASDAQ:GOOGL) gained nearly 2%. The US dollar recovered the post-US jobs data losses, the US 2-year yield stabilized near a touch above the 4.50% level, and the 10-year near the 4% mark ahead of today’s all-important US CPI data.
Investors are not feeling fully comfortable into today’s US inflation print, as there are several factors warning of a second blip in US disinflation that could eventually lead to a further softening in dovish Federal Reserve (Fed) expectations. One of them is the jump in gasoline prices in February, another is the change in CPI calculation and the third is the rising inflation expectations. Released yesterday, New York Fed’s survey showed a steep rise in 3 and 5-year inflation expectations, and a steady expectation of around 3% for this year. That means that consumers who have been surveyed by the New York Fed don’t expect inflation to ease much further from the actual levels. And that’s a problem because inflation tends to be self-fulfilling. In numbers, the headline inflation is expected to have steadied at 3.1% y-o-y, core inflation is expected to have eased from 3.9% to 3.7% y-o-y, but monthly headline figures could pause the problem. A data set in line with expectations, or ideally lower than expected, should reinforce the Fed cut expectations for June, pull the US yields and the dollar lower. A higher-than-expected set of inflation data should soften the Fed doves’ hand and trigger a sell-off in US treasuries, a rebound in US yields and the dollar. I think that there is a chance that we have a bad surprise.
For equities, volatility will certainly be on the menu of the day, as the Fed’s data-dependent approach results in an increased focus on inflation data. Bloomberg data shows that over the past six months, the S&P 500 moved 0.8% up or down on average after the release of CPI data. And this number will likely go up in the run-up to the first Fed rate cut.
In the meantime, Germany will release its own inflation numbers, which should print a softer yearly, and a higher monthly figure. The EUR/USD retreated from post-NFP peak at yesterday’s session on expectation that the European Central Bank (ECB) will cut more than the Fed this year due to a softer economic outlook and fading pressure on wages, while yen traders are busy gathering evidence to justify a rate hike in Japan. Yesterday, the Bank of Japan (BoJ) didn’t intervene to slow the bleeding while Topix fell more than 2%. That has been perceived as a sign that the BoJ is preparing to exit the ultra-loose monetary policy. And this morning, the PPI data came in higher-than-expected to support the expectation that Japan shall move maybe in March, maybe in April, more probably in April than in March. But note that the USD/JPY is higher this morning as BoJ Governor Ueda killed the bulls’ joy again, saying that the economy is recovering moderately, but that there was some weakness seen in recent data – which I interpret as ‘forget about your March hike’.
Elsewhere, Bitcoin hit a fresh record yesterday, a coin traded at $72K level. The massive inflows that have been allowed by the introduction of spot ETFs and the upcoming halving are fueling the actual rally in Bitcoin. The bulls are eyeing the $100K mark, I believe we will get there. But what will happen after is yet to be seen. Bitcoin rallies on classical demand/supply dynamics today, but the use cases have not been following the price move. On the other hand, flows point at higher Bitcoin and make Bitcoin a good diversification option as the coin is moving on its own fundamentals and not on traditional market news. Therefore, the CPI print will certainly not derail the rally.
Back to traditional space, your good old gold is consolidating gains near record high, as well. Any rebound in US yields on a potential CPI disappointment could trigger profit-taking and a pullback at the current overbought market levels, but softer yields on a soothing CPI could encourage another test of the $2200 level.