HomeContributorsFundamental AnalysisHere Comes CPI Wednesday

Here Comes CPI Wednesday

USD risk skewewd to the uupside ahead of CPI report

The last jobs report is still in everybody’s mind as it had some unexpected consequences. Indeed, the upside surprise in wage growth triggered last week equity sell-off and send equity volatility through the roof. The January CPI figures, which are due for release this afternoon at GMT 13:30 pm, will be highly scrutinized as a better-than-expected read could potentially trigger another equity sell-off.

The headline CPI is expected to rise 1.9%y/y following an increase of 2.1% in December. Market participants anticipate the core CPI to increase 1.7%y/y for January following a rise of 1.8% in the previous. It would not be surprising to see a stronger reading in headline CPI, thanks to a surge in energy prices. Regarding the core measure, it is unlikely that the cost of rental accommodation and healthcare accelerate further in January. Finally, the persistent weakness in the greenback could give an extra boost to US prices. On a trade-weighted-basis, the dollar fell more 3% just in January, following a decrease of 1.2% in November and 1.1% in December.

During the Asian session, the US dollar stayed on the back foot, as investors don’t know where to stand ahead of the release. We think that the risk is significantly skewed to the upside as investors remain mostly short USD.

Confusing JPY

Japan’s 4Q 2017 real GDP rose 0.1% Q/Q and annual 0.5% Q/Q, below expectation for annualized 1.0% increase. However, the Japanese economy has now experienced two years of growth. In a marginal shift Private consumption rose 0.5% Q/Q suggesting household are becoming more confident in economic outlook. JPY continues to appreciate bit overall behavior is confusing. Historical relationship between USDJPY and yields has totally decoupled. During recent period of volatility FX traders favored haven currencies like the JPY and CHF, as well as the EUR.

Yet vol hast decreased significantly, as US interest expectations shown by 10-year breakeven has fallen. Japanese government leaders confirmed their confidence in BoJ Governor Kuroda, bolstering expectations that he will be reappointed for an uncommon second term. Kuroda dovish pedigree indicated at talk of early exit is unwarranted. Clearly, from today data growth has returned but hardly strong enough to demand investor’s attention (especial considering jpy inverse relationship between strength and exprt growth). USDJPY 107.30 “line-in-the-sand” failed to put up much of a fight.

UK inflation in line with expectations but careful with doldrums risk

UK January Consumer Price Index Y/Y ended at 3.0%, in line with expectations and confirming the view of the Bank of England to tighten monetary policy sooner than expected (probably in May 2018), largest contributors to this increase (CPIH Y/Y data) being Housing & Household Services (+0.52%), Transportation (+0.43%) and Recreation & Culture (+0.41%). Recent data are bad news for UK consumers, as wage growth remains weak, valued at 2.20 as of September 2017 in nominal value according to the Office for National Statistics and currently estimated at 2.50%. GBP/USD decrease since Brexit referendum (-3.60% since June 2016; +2.94% Year to date) also contributed to inflation increase, outbidding costs of imported goods and services. Despite this inflationary scenario, the BoE remains optimistic and maintains its prevision of an inflation rate at 2.40% for 2018, expecting an inflation slowdown for 2018 due to recent commodity prices pullback (Bloomberg Commodity Index down by 4.47% since the end of January).

No clear reactions were noticed following the announcement. The FTSE 100 and FTSE 250 closed at 7’168 (-0.16%) and 19’320 (-0.31%) points while GBP/USD and GBP/EUR pairs were maintained at 1.3894 and 1.1246.

We expect Brexit negotiations to be the main factor as to determine whether the BoE will be able to maintain price stability for the coming year, as a weaker GBP would cause further harm to UK purchasing power (UK consumer spending gives first signs of weakness according to a recent payment processing company published data on UK payment processing). In any case a sudden rate hike would cause further harm by exposing households holding consumer credits or real-estate loan to higher interest rates, coupled with strong inflation.

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