War of words gone in a different stage
CPI data will provide fruit for thought for the Fed
President Trump notched up the geopolitical uncertainty yesterday with his new comments ‘may not be tough enough’. A tit for tat reaction is expected from North Korea and what investors are hoping for, is that perhaps there will be only words and no actions. The war of words has just gone into a complete different territory. China, the second biggest economy in the world, isn’t prepared to have only one role in this, which is neutral.
The entire situation has created a major spike in the volatility and the option volume has surged to some eye-popping level. The VIX spiked nearly 45.5 percent yesterday which marks the 8th biggest gain for the index in history.
The risk-on mode is in full swing with investors piling their bets on the Japanese yen, the Swiss Franc and the yellow metal. Profit taking is the major theme when it comes to the equity market. The MSCI emerging market has witnessed some serious blood bath with investors jumping off the boat, and the index has suffered its worst loss since May.
Today is also the CPI economic reading day and investors are watching this number very closely since the European central bank, the Fed, hold all inflation data very dear to their heart. The CPI data out of Germany have matched the forecast but the euro has refused to pay any attention as the number failed to go beyond the consensus estimate. The ECB will have to take a very measured approach in the light of these numbers because a premature decision would have a cost which could be unbearable.
The Fed has played one beat when it comes to inflation, and the recent weakness in the inflation is transitory. Today’s number will resolve that matter more adequately. The consensus is for a strong number of 1.8 percent from the previous figure. The core CPI number is not expected to move any muscle.
Russia faced tough sanctions during its conflict with Crimea and the sanctions cost dearly. But the country has shown that it has the ability to ward off those dark days. The country is expected to report the GDP reading for the last quarter and the forecast is for 1.7 percent. If the actual number matches the forecast, it would be the biggest annual increase in nearly three years. The good news does not stop there because this will be a third straight quarter of y/y growth.