Market bulls have endless optimism this year, it is amazing. Whether it is funded or not, is yet to be seen.
Because the major market action happens against the Federal Reserve (Fed), and its claim that it will take the rates higher than 5% and keep it there and not cut it before the year ends, there is not much consensus.
Some see ‘the recent move higher in front-end rates is supportive of the notion that the Fed may remain restrictive for longer than expected’ but that ‘the equity market is refusing to accept this reality’ (JP Morgan). While some think that the bear market is over, and that ‘healthy balance-sheets at both the corporate and consumer level suggest a subdued level of systemic risk, meaning the catalyst for an extended market downturn is largely absent’ (Wells Fargo).
I don’t necessarily see a solid funding for an extended rally in the markets, unless we have fundamentally good news.
And slowing inflation is the type of fundamentally good news that I am looking for.
Because slower inflation doesn’t only mean a healthier economy and less pain for the future, but it means that the Fed could indeed soften the tone as the policy rate approaches the 5% level, and a weakening pressure on borrowing costs could give a loving hand to the stocks and bonds.
The problem is, nothing is less sure than the idea that we will see a sufficiently soft inflation report from the US today.
A few indicators point at a certain uptick in inflation in January figures, as
- Energy and commodity prices were up for the first three weeks of the year, though they gave a part of gains, January prices were impacted by higher energy and commodity prices.
- The prices of used cars in the US unexpectedly rose in January.
- The rapid fall in inflation since last summer was due to the retreat in energy and second-hand car prices, but also due to the easing tensions on supply chains and falling transportation costs post-pandemic. But nowadays, warehouses and distribution centers are reportedly pushing rates higher. According to a CNBC news, US storage prices went up 1.4% over the month and nearly 11% over the year, and that could apply some fresh pressure on consumer prices.
What we know is, there will be a point where inflation will be harder to pull lower, than it has been when the CPI was flashing above 9%.
Where is that point, is anybody’s guess. But as the CPI numbers move lower, it may be difficult to see big chunks of easing.
For today, the expectation is that the US headline CPI may have slowed to 6.2% in January, from 6.5% printed a month earlier, on a yearly basis. The core inflation is seen going down to 5.5% from 5.7% from a month earlier.
On a monthly basis, core inflation is seen stable around 0.4%, while headline inflation is seen ticking higher from 0.1% to 0.5%.
A sufficiently soft, or ideally a softer-than-expected CPI read today should give an additional boost to the equity bulls and push the S&P500 to fresh highs in the actual positive trend.
A stronger inflation read, on the other hand, could easily bring the Fed hawks back to the marketplace and send the S&P5600 tumbling. The next key support stands at 4030, the minor 23.6% retracement level on October to February.
In the FX
The US dollar has seen a crowd of sellers above the 50-DMA. A strong inflation data could finally send the dollar index sustainably above its 50-DMA, while a soft reading will be a good reason to sell the rebound.
The EURUSD continues its own struggle around the 50-DMA. The EU raised its growth forecast generously from 0.3% to 0.9% for this year. All member states will grow except from Sweden.
But but… Germany and Austria will still suffer two straight negative quarters while Italy will feel the pain during the first three quarters.
It’s not brilliant. But at least it doesn’t get on the way of rate hikes expectations from the European Central Bank (ECB).
In Japan, Kazuo Ueda has been nominated as the next Bank of Japan (BoJ) governor. There are rumours that the new BoJ leader could scrap the YCC policy. The yen was better bid in Tokyo, but the US CPI data is probably what will determine the short-term direction both in EURUSD and the USDJPY.
What do we really, really want?
What everyone wants to see is a soft US CPI figure, a softer US dollar, strong equities, improved bonds, and stronger other currencies.
What everyone fears however is a figure that’s not convincingly softer.
The only sure thing is, the CPI days are known for their high intraday volatility.
