US CPI data were stronger than expected, however the positive impact on the USD quickly faded. US Treasury yields are higher, but that hasn’t stopped US equities recovering further.
The core US CPI rose by 0.3% m/m in January, 0.1 percentage points ahead of market expectations and a slither away from being rounded up to 0.4%. The data added to the case that last year’s dip in inflation was temporary, with a recovery in some of the components that had held inflation lower. The three-month annualised rate of core inflation is now a hefty 2.9%, the fastest rate since 2011. Released at the same time, US retail sales were much weaker than expected, alongside a downward revision to the previous month.
The market put more weight on the CPI than retail sales data, which saw US Treasury rates higher across the curve and added to the chance that the Fed would revise up its rate projection for this year from three hikes to four at its March update. The market still prices in less than three hikes (67bps) for 2018, albeit higher than the 58bps priced in yesterday. The 2-year rate is up 6bps to 2.16% and the 10-year rate is up 6bps to 2.89%, a fresh four-year high.
US equities (S&P500) opened 0.5% weaker after the inflation and retail sales data but have recovered to be currently up 0.6%, on track to record a fourth consecutive daily increase. Clearly, the buy-the-dip brigade is in charge following the meltdown over the previous couple of weeks, being unperturbed by the higher interest rate outlook.
The USD rose by 0.5% after the CPI data but within 90 minutes had given up all of that gain and more, with no obvious reason for the reversal. One economic reason would be that the USD shouldn’t have appreciated in the first place if one takes the view that higher inflation simply offsets higher nominal rates leaving real rates the same or even lower, while the retail sales data portray a softer economic picture.
Despite wider ranges since the NZ close, net currency movements have been modest, with most of the apparent USD weakness for the day as a whole reflecting a swoon late yesterday afternoon. The NZD is currently trading around 0.7340, only a touch higher from the NZ 5pm level yesterday, after falling as low as 0.7240 immediately after the US CPI figure. The high overnight was 0.7351 so the range has been more than one cent. The strong 5pm close yesterday followed a slightly higher 2-year inflation expectations figure from the RBNZ survey, a survey that doesn’t deserve the light of day to be frank and one that the RBNZ has recently suggested is now “unreliable”. The survey release coincided with a bout of broadly-based USD selling which explains most of the 60pip move leading into that close.
Earlier in the day, NZ food price inflation data for January were much weaker than expected – the 1.2% gain for the month was minus 0.6% after seasonal adjustment. Alongside a fall in petrol prices the data raised the risk that CPI inflation falls to 1.0% in Q1 or even below the bottom of the target band. This could increase chatter about the possibility of a rate cut in the months ahead but we still think that the medium-term outlook for higher inflation would ultimately prevent such a move. However, the stripes of the incoming Governor will matter a great deal. The local rates market was unmoved by the data, with the 2-year rate steady at 2.15% and a modest fall in longer term rates being more a reflection of global forces. The 10-year swap rate fell by 3bps to 3.26%, but higher rates overnight should see that move reversed today.
Looking at other currencies, GBP has been the only notable mover since the NZ close, trading up to 1.3980 on no fresh news. Yesterday afternoon, USD/JPY broke down through the 2017 low of 107.32, largely driven by the aforementioned USD weakness. Overnight it has traded down to 106.72. Japan Q1 GDP data were softer than expected, after a strong run and didn’t impact the market. Euro-area GDP for Q4 was strong, in line with the advance estimate. EUR/USD has recovered to trade above 1.24. NZD/AUD moved up through the 0.93 mark, with the AUD failing to keep pace.
The local trading session sees the release of REINZ housing market data and Australian employment data, where the unemployment rate is expected to be steady at 5.5%. There are a number of US economic releases but none of them top-tier. Further pondering over the impact of the US inflation data is likely to be the key driver of markets.
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