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Don’t Get Too Excited by Soft Eurozone Inflation

The first set of inflation data from the Eurozone countries was mixed. German inflation eased more than expected from 6.4% to 4.3% in September, a level last seen before the war in Ukraine. Base effect due to public transport’s disappearance from the comparison and statistical distortions explained a part of the significant decline. In Spain however, prices jumped for the second straight month to 3.2%. The latter gave an idea of how the rising energy prices and weakening euro would impact the inflation figures in the coming months. Later this morning, we will find out the overall Eurozone inflation number for September. With a little bit of chance, the actual data will meet the soft market expectations, and strengthen the hand of the European Central Bank (ECB) doves. Yet this month’s figures should be taken with a pinch of salt.

The EURUSD tipped a toe below the 1.05 mark than rebounded on the back of a global retreat in the US dollar rally. The dollar retreated on the back of a soft set of economic data. Except from the light jobless claims report, the data showed that corporate profits didn’t improve as much as expected, real consumer spending slowed and the US GDP was revised marginally higher from 2% to 2.1%. The soft looking data led to some profit taking in the greenback. The dollar index retreated after a four-day rally that pushed it to the highest levels since November. The US 2-year yield retreated, but remains a touch above the 5% mark, while the 10-year yield flirted with the 4.70% level, with little respite as the longer end of the curve is impacted by a more crowded treasury issuance and the QT.

The US PCE, the Federal Reserve’s (Fed) favourite gauge of inflation, is due before the week ends, and the US government shuts down. Core PCE may have slowed in August but the headline figure will likely reflect the rising gasoline prices, which could push the Fed doves out of the race.

On the US most fun-to-watch political scene, there was not much progress regarding the negotiations to avoid a government shutdown. The US government will more likely be shut from next week, than the contrary. In Detroit, the UAW accepted to lower the pay rise that they demand to 30%. I am not sure that Ford, which decided to halt the construction of a 3.5 billion EV battery plant in Michigan will come back to its decision given the size of the rise that they will have to endure in all cases.

Winner winner, Japanese dinner

Inflation in Japan came in slower than expected in September. Core inflation in Tokyo was even negative on a monthly basis, whereas retail sales and industrial production didn’t slow, and one and two-month forecasts for industrial production were revised higher. Of course, they were, have you seen how supportive the Bank of Japan (BoJ) is! If the US dollar rally wasn’t cooling, we would’ve seen the USDJPY go straight above the 150 level. But any renewed strength in the US dollar could send the USDJPY above the 150 mark. If we hear no intervention from the Japanese, verbal or concrete, the rally could continue toward 155. But again, if you decide to swim in these waters, it means that you are taking the risk of a sudden intervention that could leave you on the backfoot in what is, in theory, nothing but a reasonable trade.

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