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DXY appreciated by 0.7% to 104.9. As we expected, US CPI inflation did not slow to the 2.9% consensus in January from 3.4% in December; it came in stronger at 3.1% instead. Excluding food and energy prices, CPI Core inflation was unchanged at 3.9%, underscoring the Fed’s warning that the last mile to bring inflation to the 2% target will be challenging. Today, Fed Vice Chair Michael Barr and Chicago Fed President Austan Goolsbee will provide the first impressions on the CPI data. Meanwhile, President Joe Biden and National Economic Council Director Lael Brainard have hit out at US companies for reducing the sizes of products they sold at the same price. Other US lawmakers will likely join the growing debate on “shrinkflation” and “greedflation” during this election year.
Interest rate futures reduced the odds of a Fed hike in May to 27% yesterday from 51% on Monday. For all of 2024, futures are aligned with our forecast for four cuts instead of the seven they discounted a month ago. The US Treasury 10Y yield increased 13.5 bps to 4.314%, its highest close since 30 November, sending the Dow and S&P 500 indices down by 1.4% each. The Nasdaq Composite index fell by 1.8%. Succumbing to risk aversion, the commodity-led currencies AUD, NZD, and CAD depreciated by 1.2%, 1.1%, and 0.8% on Tuesday.
JPY depreciated by 1% to 150.8 per USD, closing above 150 for the first time since mid-November. Despite the higher US bond yields, the 10Y JGB yield was barely changed, around 0.73% for a third session. Even so, markets should be alert to intervention risks as USD/JPY approaches a trendline resistance around 152. Tomorrow, consensus expects Japan’s GDP to expand by an annualized 1.1% QoQ saar in 4Q23 after a 2.9% contraction in 3Q23. The greenback could return some of its appreciation if tomorrow’s US advance retail sales do not surprise and meet the consensus to contract by 0.2% MoM in January vs. the 0.6% increase in December.
EUR/USD depreciated by 0.6% to 1.0709, its worst close since mid-November, on the Eurozone’s weaker GDP growth and inflation vs. the US. Eurozone’s GDP growth languished between -0.1% QoQ sa and +0.1% sa for five quarters into 4Q23. Conversely, US GDP growth remained resilient at an annualized 3.3% QoQ saar in 4Q23 from 4.9% in 3Q23, with the Atlanta Fed GDPNow model looking for 3.4% growth in 1Q24. In month-on-month terms, Eurozone CPI inflation fell by 0.4% MoM in January vs. a 0.2% increase in December, while US inflation increased to 0.3% from 0.2%. Understandably, interest rate futures see a higher 78% chance of the European Central Bank lowering rates in June vs. the 58% odds on the Fed. ECB officials have been less unanimous than their peers at the Fed in pushing back the aggressive rate cut bets this year. EUR/USD’s downside remains intact after failing to rise above its 100-day moving average (1.0795) in the past seven sessions. GBP and CHF were not faring well either, falling by 0.3% and 1.3% on Tuesday.
Quote of the day
”Love doesn’t make the world go ‘round. Love is what makes the ride worthwhile.”
Franklin P. Jones
14 February in history
Pope Gelasius declared February 14 St. Valentine's Day at the end of the 5th century.
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