Is the US January CPI Anti-Climactic?

Overview: Equities in Asia extended their recovery and Europe's Stoxx 600 is up for the fourth consecutive session.  US futures, are, however, trading lower ahead of the January CPI figure.  Benchmark 10-year bond yields are mostly firmer, with the US 10-year hovering around 1.95%.  European yields are 2-4 bp higher, and peripheral-core spreads are widening a little.  The dovish hold by Sweden's Riksbank has the krona joining the yen as the laggards today, which have seen most major and emerging market currencies edge higher.  The JP Morgan Emerging Market Currency Index is posting small gains for the fourth consecutive session.   Gold made a new marginal high for the month, but met sellers around $1836, pushing it back toward $1830.  The unexpectedly large draw down in US oil stocks (4.75 mln barrels, the biggest decline since last September) had helped March WTI regain the $90 handle after a brief bout of profit-taking.  US natural gas prices are steadiest, while Europe's benchmark was a little softer.  Copper is up for a second day, while iron ore jumped by more than 5% after yesterday's 1.75% loss snapped a six-day advance. 

Asia Pacific 

The BOJ moved to defend its Yield Curve Control policy.  The yield on the 10-year JGB crept closer to the 0.25% cap as the market tested the central bank's resolve.  The BOJ announced it would buy an unlimited amount of 10-year bonds on Monday at a fixed rate of 0.25%.  Japanese markets are closed for a national holiday tomorrow.  It is the first such operation in 3.5 years. 

With today's purchases, the Reserve Bank of Australia completed its QE.  It holds about 40% of the government's debt or around A$650 bln.  Last year, the RBA bought about three-times more bonds than the government issued.  Sequentially, the next issue is what to do with the maturing proceeds, and Governor Lowe said a decision will be made in May.  The Bloomberg survey finds most economists expect a hike in August, while the swaps market sees the hike a little earlier. 

China's aggregate lending soared to record levels last month of CNY6.17 trillion.  Lending typically rises in January as new quota are tapped. However, the increase was well more than expected.  Bank lending was strong (CNY3.98 trillion), but so was shadow banking activity (the difference between bank lending and aggregate financing). Still, it seems to simply confirm what was already signaled, namely that officials have shifted their stance to support the economy.   

The US dollar drew the closest to JPY116.00 in a month.  The high was made in the brief overlap of last Asia with early European activity.  There is an option for $750 mln that expires tomorrow at JPY115.75.  Support is seen a little lower, near JPY115.50. The Australian dollar is pushing toward $0.7200, a level it has not been above since January 21.  Above there, we have been looking for $0.7230.  The Aussie seems well supported, with over A$1 bln in options expiring today between $0.7150 and $0.7155, though the intraday momentum indicators are stretched.  The PBOC set the dollar's reference rate spot on the median forecast in the Bloomberg survey at CNY6.3599.  The dollar eased to a marginal new low for the week (slightly below CNY6.3540).  Note that India and Indonesia held policy rates steady.  

Europe

The European Commission published a new economic forecast today.  While it raised its CPI forecast this year and next, it still has the rate below 2% next year.  This year's projection was raised to 3.5% from the 2.2% forecast made last November.  Inflation next year now looks to be 1.7% rather than 1.4%.  Price pressures are anticipated to peak just shy of 5% this quarter (4.8%) and stay above 3% until Q4, when they fall to 2.1%.  The EC shaved its growth forecast for this year to 4.0% from 4.3% but sifts it into 2023 by raising its forecast by 0.3% to 2.7%.  The real interest is with the ECB forecasts in March, and some see the EC forecasts as a hint of what the central bank update may look like.  

Sweden's Riksbank left policy steady as widely expected.  It now sees the H2 24 rather than in Q4 24.  The swaps market is less sanguine and has about 70 bp of tightening priced in over the next 12 months.  There were three dissents over its bond purchases and advocated a more pronounced tapering.  Governor Olsen cast the deciding vote to continue its QE.  With upward revisions in the Riksbank CPI forecasts, the decision appears to be a dovish hold.  This year's CPI forecast was raised to 2.9% from 2.3%.  Next year's CPI projection was tweaked to 2.0% from 1.9% and 2024 to 2.4% from 2.2%.  The Swedish krona is the weakest of the major currencies today, off about 0.65% against the dollar and 0.75% against the euro.  

The euro remains in Tuesday's range, roughly $1.1395 to $1.1450.  It is near the upper end of the range in the European morning.  It is unlikely to make much more headway ahead of the US CPI figures.  The $1.1500 level is the important cap, and it appears to be protected in by two large option expirations there, with a 1.76 bln euro option today and a 1.9 bln euro option tomorrow.  Initial support is seen in the $1.1420-$1.1430 area.  For its part, sterling continues to chop between $1.35 and $1.36.  It reached the session high near $1.3580 in early European turnover and met a wall of sellers. Nearby support is seen at $1.3540, and then $1.3520.  The UK reports Q4 GDP and details for December tomorrow.  

America

Today's US January CPI may be a bit anti-climactic. Nearly everyone expects a small acceleration to 7.2%-7.3% from 7.0% at the end of last year.  The market has fully discounted a 25 bp hike next month and has about a 30% chance of a 50 bp move. Still, it may be near a peak, and at least one Fed official (Bostic) has said as much.  Remember that last year, the CPI surged from March through August.  As they drop out of the 12-month comparison, the year-over-year rate will likely ease. 

Mexico reported slightly higher than expected January CPI yesterday and it reinforced expectations of a 50 bp hike today that would lift the overnight target rate to 6.0%.  It is the first meeting with the new governor, Victoria Rodrigues Ceja, at the helm.  Some observers expressed concerns that she was untested and likely dovish.  A 50 bp hike at her first meeting, especially given the fact that the economy contracted in Q3 21 and Q4 21 (a simple rule of thumb for a recession), would underscore the central bank's anti-inflation credentials.   

Bank of Canada Governor Macklem sounded a hawkish note yesterday, warning that the policy rate may have to go over neutral (2.25%) in order to address the price pressures.  The swaps market has stopped just shy of this (almost 2% in 12 months and 2.25% in 24 months). Canada reports January CPI next week. It stood at 4.8% in December. 

The US dollar continues to hold important support in the CAD1.2650-CAD1.2660 area.  There are options for $700 mln that expire today at CAD1.2670.  Tomorrow, the optionality is stronger.  Options for almost $4.5 bln struck between CAD1.2650-CAD1.2660 expire. Tomorrow, there is also another option for CAD1.22 bln at CAD1.2685.  Ahead of the Banxico meeting, the peso is bid.  The greenback is near three-week lows against the peso around MXN20.42-MXN20.43.  A break sets up a test on the 200-day moving average near MXN20.33.  Last month's low was near MXN20.28. Still, the North American session may be more cautious.  A bounce could lift the dollar toward MXN20.50.

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