Thu, Mar 23, 2023 @ 02:03 GMT
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What If US Inflation Didn’t Ease as Much as Expected?

US equities recorded their worst week since the year started.

Hawkish comments from many Federal Reserve (Fed) members hammers sentiment, as stress mounts before the much-important US CPI data due Tuesday.

If US inflation hasn’t eased, or eased enough, or God forbid, ticked unexpectedly higher on yearly basis, we could rapidly see the post-NFP optimism, and the pricing on the goldilocks scenario to leave its place to fear and chaos.

And I say on a yearly basis, because on monthly basis, the consensus is, in fact, an uptick to 0.4% in January from 0.1% printed a month earlier.

The surprise U-turn in used-car prices, and a rally in commodity prices on the Chinese reopening may have impacted the US prices more than what the polls predict.

So, investors are holding their breath before they see how the recent developments impacted the US inflation, and how the US inflation will impact the Fed expectations and the market sentiment.

At the start of the week, the activity on Fed fund futures hints at around 91% chance for a 25bp in the next FOMC meeting, and around 9% chance for a 50bp hike.

Note that the pricing for a 50bp is already in play. An unpleasant surprise from the CPI front could boost the odds. Remember, a single CPI print could change the expectation from 50 to 25bp for the last FOMC meeting. And there is no guarantee that the opposite won’t happen this time.

FX and energy

The US dollar index finally cleared the 50-DMA offers on Friday – which I think could be premature if tomorrow’s US inflation number is sufficiently soft.

Besides a broadly better-bid US dollar, a wave of fresh buying in the Japanese yen also marked the latest mood in the currency markets, as Masayoshi Amamiya refused to take over the Bank of Japan (BoJ), and the role will finally go to Kazuo Ueda, who is seen as being more hawkish than Amamiya.

But the first thing Ueda told reporters since the news that he will take over the BoJ broke was that the easy policy will stay in place.

The dollar-yen is testing the 50-DMA to the upside this morning, and it could be just a matter of time before we see the pair jump over this level.

The EURUSD, on the other hand, is already below both the 50-DMA and the 23.6% retracement on October to January rally. Trend and momentum indicators look bearish, with the next key support seen at 1.0470/1.05 range, the major 38.2% retracement that will distinguish between the actual positive trend and a bearish reversal, and an important psychological mark.

But because the US dollar is what leads the dance, what’s next in the EURUSD will mostly depend on what’s next in the dollar, simply.

Across the Channel, good news came on Friday: the UK avoided a technical recession. The bad news may be that a jump in sales due to the World Cup may have made a difference in the latest numbers, and the positive vibes may not last. At the end of the day, Britain is the only G7 yet to recover from Covid weakness.

Anyway, the general state of the British economy is not a concern for the FTSE 100 stocks, where 80% of the revenues are made abroad. Therefore, any weakness in the UK economy, hence strerling remain, on the contrary, supportive of the British big cap index, which hit a fresh high last week.

We could see the index coming lower this week along with other major indices, but the energy and commodity exposure of the British index is still a good thing to have.

BP’s value hit the £100 billion mark for the first time in three years, and I can assure you that last week’s price action was nothing less exciting than Bitcoin’s in its good, old days.

And speaking of energy, US crude oil jumped past the $80pb on Friday, as Russia announced to cut its production by 500’000 barrels per day, which is roughly 5% of its daily production. But gains remain limited by an overall bearish mood and recession fears, and offers remain strong into the 100-DMA, which currently stands near $81pb level.

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