The markets were reasonably busy overnight in preparation for this evening US CPI, and with some G-10 traders arguing this is the most significant economic release in the past three years, and at a minimum, the consensus is that that the US CPI release will provide the next directional signal for markets. The announcement should generate an outsized volume of noise.
There is little to fret about the forecast number in itself, but traders will be keying the divergence, direction and delta of the miss. Most certainly a higher CPI will be initially interpreted through USD strength, higher yields and lower equities bolstering the market views post-AHE narrative that inflation scare could push Treasury yields much higher and send equities spiraling lower.
It certainly feels like the proverbial calm before the storm and rightly so as there plenty of reasons to be cautious, but whether it warrants the present sense of foreboding in the markets or not, equity investors seem undeterred by the possibility of higher yields. US equities finished in the green for the 3rd consecutive day ahead of the critical inflation print despite the fresh memories of last weeks market carnage in the wake of an inflationary uptick in wage growth.
While there remains the concern that investors are shifting from growth to inflation narrative. A spike in CPI will reinforce that moving storyline and will draw much attention to the bond markets. However, the more significant risk for Bond Traders may be a tepid CPI reading given the staggering bearish short positions in United States 10-Year bonds that would likely unwind.
However, given the complexities of current market conditions straightforward outcomes are seldom honest so buckle up for a bumpy ride.
Ultimately, the Fed still holds the cards, and with the markets teasing the idea of Powell fluttering, I defer to my usual stance of expecting the unexpected when it comes to essential data readings these days.
Oil Markets
The mood is very bearish!
The oil landscape is looking a bit precarious given the rebounding S&P 500 and the weaker dollar. Oil prices are struggling dearly to find solid footing. When typical market tailwinds start blinking red on the correlation matrix something is bound to snap.
If we needed further convincing that Shale Producers are rounding into form, The American Petroleum Institute (API) reported a build of 3.947 million barrels of United States crude oil inventories for the week ending February 9, But it gets even messier for oil prices when you factor in the extraordinary build in gasoline inventories.
But when regional (Singapore) physical brokers are struggling or find buyers its something that should not be overlooked and by all accounts we could be setting up for another significant oil correction towards the fundamental WTI 55 support level.
With the market shifting from growth to the inflation narrative, an oil market correction lower will add another level of complexity into the inflation storyline as it should have a significant influence on US treasury yields (lower).
Gold Markets
The weaker US dollar and softer US bond yields certainly helped restore gold investors bravado overnight. With the US dollar once again striking a bearish chord amongst G-10 traders .the long gold set up looks favourable. However, with nearly 100% of Gold appeal trading off the back of US dollar weakness, the US CPI reading could be a day of reckoning for Gold bulls.
Currency Markets
USD is trading weaker across the board as the market is tentatively returning to familiar themes.
The Japanese Yen
Dollar-yen quickly turned into a pain trade for dollar bulls overnight. There has been a lot of discussion on the move, but it boils down to Prime Minister Abe comment we have a blank slate for choosing next BoJ governor” which saw the market tentatively position for a possible more hawkish changing of the guard at the BoJ.
But now we’ve dispatched the 108 level ahead of tonight US CPI, and with overnight vols skyrocketing, it suggests USD/JPY will be the biggest mover on the release. Of course, the set up will be immensely tricky as a high inflation print could cause an equity meltdown and trigger an immediate risk aversion currency trade while a softer copy should weigh on general dollar sentiment as the macro landscape will come under question.
The massive tail risk is on the break of 107.25 which could cause panicked exporters to enter the fray not to mention funds adjusting their USD/JPY hedge ratios.
Certainly a busy night in store in the yen desk
The Euro
Market is favouring the short USD position heading into the CPI, so USD dollar direction remains the key driver.
The Malaysian Ringgit
The Ringgit remains precariously perched ahead of today’s Key GDP.
On the contrary front, oil markets are looking increasingly bearish which is limiting MYR appeal.