A critical piece of inflation’s
Aligned with the broad expectations
Of where it will be
In one year and three
As this feeds Jay’s model’s foundations
So, yesterday’s data release
That showed expectations decrease
Is magical stuff
And could be enough
To make sure all tight’ning will cease
While Thursday’s CPI report remains the key data point this week, there are plenty of other data points that get released on a regular basis that can give clues to how the economy is behaving, and perhaps more importantly to how the Fed’s reaction function may respond. One of the lesser-known inflation readings is published by the NY Fed each month and shows Consumer Inflation Expectations one year ahead. As can be seen in the below chart from tradingeconomics.com, the trend has been very positive (lower inflation expectations) for the past two years.
This must warm Powell’s heart as it appears his efforts at anchoring inflation expectations continue to work. When combining this data with comments from two Fed speakers, Bostic and Bowman, who both indicated some satisfaction with the recent trajectory of inflation and were comfortable with the idea of rate cuts later this year, it is easy to see why yesterday was such a bullish one for risk assets.
Perhaps of more interest, at least to me, was the Consumer Credit Change report which showed that in November, consumer credit rose by a very large $23.75B! This was the largest increase in twelve months and plays to the idea that people are using their credit cards to purchase consumer staples because they cannot afford them anymore. On the flip side, given the way economic growth is measured, this will be a positive for Q4 as it implies more ‘stuff’ is being bought. To my eye, this seems to be a short-term positive, but offers the chance of being a medium-term negative as delinquency in loans is typically not seen in a beneficial light and there are already many stories of people being overextended on their credit cards.
As well, Tokyo CPI was released overnight at 2.4%, 2.1% Core, which was right on expectations, but more importantly, indicative of the fact that inflation pressures in Japan are quickly ebbing. Perhaps the BOJ’s view that they did not see sustainable price inflation despite almost 2 years of CPI prints above their 2.0% target, is turning out to be correct. This has huge implications as it means there is little reason for the BOJ to consider exiting its current monetary policy combination of NIRP and QE combined. As an aside, 10-year JGB yields fell 2bps last night and are currently at 0.58%. This does not seem like a panicky level, nor one that is necessarily going to attract a lot of internationally invested Japanese money back home. For all the JPY bulls out there, this is not a good sign.
Away from that news, European data continues to show Germany in a world of hurt, with IP falling -0.7% in November, far worse than expected and the 6th consecutive decline in the series. However, Eurozone unemployment fell a tick, back to 6.4% and the lowest in the history of the series. Meanwhile, the ECB just published a report indicating that the inflation suffered by the Eurozone was due almost entirely to supply chain disruptions with a small dose of energy price spike. It had nothing to do with their policies! To an outsider like me, this sounds like they are preparing to cut rates as soon as they can. I wouldn’t be surprised if Madame Lagarde was on the phone with Chairman Powell right now!
And that’s really all we have seen overnight. After yesterday’s strong rebound in the US, the overnight equity picture was somewhat mixed with Japan having a good session on the weak inflation data although the Hang Seng continues to slide. Overall, there was no unifed trend in Asia with gainers and losers both. European shares, though, are in the red this morning led by Spain’s IBEX (-1.75%) although that is the outlier worst performer. (It seems that a single stock, Grifols, a pharma name, is down -28% on some recent reports about manipulated accounting and that is dragging the whole index lower.). However, US futures are also softer, down about -0.4% at this hour (8:00). There is still much discussion if last week’s sell-off was just a reaction to a huge late 2023 rally, or the beginning of something much bigger.
In the bond market, Treasury yields have edged up 1bp this morning but remain either side of 4.0% for now. European yields, though, are higher across the board once again, by between another 5bps and 6bps. Now, this move is based on yesterday’s close, which saw a drop in yields at the end of the session there. While the trend in European yields looks higher, they are little changed from this time yesterday.
Oil prices (+3.1%) are rebounding nicely from yesterday’s sharp decline. You may recall that Saudi Arabia cut its selling price yesterday and the market read that as a sign of weak demand. However, this morning, that story has faded and continuing tensions in the middle east seem to be having a bigger impact. This is confirmed by the fact that gold (+0.35%) is rebounding as well although the base metals are mixed this morning with copper slightly higher and aluminum slightly lower.
Finally, the dollar is a touch stronger this morning, but not really by much. Versus the G10, I see gains of about 0.15% or so with NOK (+0.25%) the exception as it is responding to the rebound in oil. Versus the EMG bloc, the picture is clearer with almost all these currencies a bit softer, albeit between -0.2% and -0.4% generally. The dollar continues to be the least interesting asset bloc around for now and is likely to remain so until the Fed starts to actually change policy rather than simply hint at it.
On the data front, we see the Trade Balance (exp -$65.0B) and we have already seen NFIB Small Business Optimism print at a better than expected 91.9. But, while that is a nice outcome, recall that the index is back at levels below Covid and only above those seen in 2008 and 1980! Fed Vice-Chair for regulation, Michael Barr speaks at noon, but my guess is he will be right in line with the recent commentary that things look good, but they are not done yet.
As I wrote yesterday, with the bulk of the focus on Thursday’s CPI print, I expect that while markets might be choppy, there will not be much directional information overall.
Good luck
Adf
fxpoetry 