The German Final CPI came in as expected and Chinese inflation data came in higher than expected. The market traded higher after both data points in the pre-market trading ahead of the London open. We’re now waiting for central bankers to add their thoughts into the mix and the important CPI data from the US this afternoon.
In-between several central bank monetary committee members speaking yesterday, the markets bounced around in small ranges, resulting in choppy trading for intraday traders. Several Fed members made excuses for why they had misinterpreted inflation and that it was now their job to bring inflation down quickly. Mester discussed the Fed's 75bps rate hikes being used if inflation does not ease at the current rate 50bps rate increases. Markets are expected to see a 50bps rate hike over the next 2-3 FOMC meetings.
The Fed Funds Effective Rate is currently 0.33, the Interest Rate on Reserve Balances is now at 0.9%, and the Fed Funds Target Range - Upper Limit is at 1.0%. Here is a chart of the US Treasury 2-year yield, which is blatantly affected by Fed monetary policy and currently trading at 2.54%. If the FFER follows the 2-year yields, we can expect more than a 2% rate increase before the Fed slows down.
Unfortunately, we have many more speeches from central bankers to contend with today, including ECB President Lagarde. Apart from the speeches and continued earnings season, the war in Ukraine, and discussions around Brexit (6 years later), we can look forward to the US CPI data print.
Today’s expectations are for the US CPI YoY NSA rate to come in slightly below the previous month's reading, which would be the first drop since the blip we saw in August 2021. During the Asia-Pac session, Chinese inflation came in higher than expected.
Arguably the biggest driver of inflation is energy and today the Brent chart continues to trade within the wedge. There have been talks of Natural Gas pipeline disruptions in Ukraine which would usually flow to Europe. The energy users would be switching to oil and petroleum to generate energy if their supply of gas is cut off and this is going to support oil prices but also translate into higher gas prices too if Russia cannot re-route the gas around the disruptions. This afternoon we also learn whether the expected draw on US crude stocks shows increased demand in the EIA weekly report.
The German DAX has a good day yesterday and formed a bullish outside day candle pattern. This morning’s European open has also started off positively, so we could be in for a positive day if the ECB members don’t come across as too pessimistic.
The forex heatmap is looking more risk-on this morning with commodity currencies in the green and the US dollar and yen in the red. If we could see added weakness in the Swiss franc that would give traders more reason to buy into the equities too.
I am going to watch the AUDUSD to see if the coming days get the price action back above the 0.70580 level, which would signify that the bounce off the green trend line was a legitimate level of support and not just a place to take profits. There is still a lot of trading to be done to get a higher swing high and higher swing low, which would attract more buying pressure, so we have time to work out what is going on here.
The US dollar index (DXY) will come into focus at the US CPI release today and my base case scenario is for the DXY to pop higher and continue its bull trend. The price action has been going sideways for several days now so the energy is building ahead of the upcoming economic data releases.