Upside surprise in US CPI – the USD is key to broad markets

2023年2月15日

After some wild price action across markets post-CPI, things are settling down and calmer heads prevail. It was a wild day for the day traders, and an exercise in trading over news, with positioning, liquidity and flow all factors that saw market players react aggressively.

The US core CPI print was a touch above consensus at 5.6% YoY, but the market seemed to do some digging and saw core goods +0.1% MoM, which arrested the price declines seen since Sept. We did see some moderation in services ex-shelter to 0.56% (from 0.61%), a variable the Fed do look at closely - but really when we look through the factors what matters is how the market sees this – that being the collective wisdom.

The first port of call for me is the rates market – the first derivative – here, we see market expectations haven’t changed for the March FOMC and a 25bp hike is a lock – we did, however, add 8bp to expectations of hikes by July, so the market now expects fed funds to hit a range on 5.25% to 5.50% by mid-year - when we see the core CPI index at 302.70 – a new cycle high, this makes sense.

In theory, we should get one more 25bp hike from the Fed in March, another in May (there is no April FOMC meeting) and potentially one final hike in June – then a pause, but I’d be strongly inclined to say – unless we see a massive vol shock to markets - no cuts until 2024.

We also saw the US 2yr Treasury up 10bp to 4.61% - so short-end rates have firmly broken out and we target the highs seen in Nov of 4.80%. Longer-term bonds found modest upside, so curves get further inverted, and real rates moved higher. Given the move in USTs, it’s a huge surprise that the VIX index fell 1.4 vols to 18.91% - this screams that equity and volatility traders felt relief that we’d moved past a tail risk and there was no major surprise in the CPI outcome (it was largely inline) and subsequently unwound downside risk hedges.

The DXY traded in a near 1% range - recording the session high to low range shortly after the CPI – after that, things settled and we’re flat-lining through Asia – the market isn’t sure how to deal with this – they see the immediate risks as finely balanced, subsequently, traders are taking timeframes in and playing intraday mean reversion moves.

EURUSD remains in consolidation mode between 1.0800 and 1.0650, while AUDUSD holds 0.7000 to 0.6900. By way of USD catalysts, we watch the upcoming US retail sales report (00:30 AEDT), with the market eyeing a 2% MoM lift here, and then the PPI inflation on Friday (17 Feb at 00:30 AEDT), which could cement expectations for the core PCE inflation print due on 25 Feb.

I am certainly warming to USDJPY longs; price is above the 5-day EMA, which is moving higher and if this kicks above 133.31 – which needs work as Asia looks to fade the rally - I fancy this to continue for 134.00 – again, that will require a decent US retail sales number.

GBP interests as we head into UK CPI in the session ahead – the market has been covering GBP shorts into the release and this has boosted cable into 1.2200 – GBPJPY has been the alpha play though and we see price threatening to break the top-end of its recent range at 161.75 – a UK CPI print above 10.5% would likely be the catalyst to see GBPJPY break out, but whether it starts to trend is another thing – obviously, we never know. EURGBP has found buyers into the 61.8% fibo of the Jan-Feb rally at 0.8818, a break and I would be short for 0.8760.

The moves in US equity have been resilient – the NAS100 cash closed higher and outperformed other benchmarks, which is a surprise given the discount rate moved higher – Tesla closed +7.5% and semi’s found good buyers. Volumes were a touch light, and breadth was poor, so that subtracts from the quality of the 0.7% rally in the NAS100 cash move – and as we look around, we see a heavy tone in Asia – granted, CBA has failed to blow the lights out and is trading 3.7%, but the AUS200, HK50 and CN50 are all lower and negatively impacting US equity futures.

While I think the purest reaction has been seen in US rates, and the front-end of the US Treasury curve (i.e. they saw the CPI as offering scope to hike), traders may see the world in a different light today in the session ahead. I think the USD is key – if this kicks up then equity and XAU will likely find sellers.