- US December CPI +6.5% y/y vs +6.5% expected
- US initial jobless claims 205K versus 215K estimate
- Fed's Bullard: US households still remain flush, should support consumption
- Fed's Harker: It's time for Fed to shift to 25 bps increments
- Fed's Barkin: Supportive of rate path that's slower but potentially higher
- US December federal fiscal deficit $85.0B vs $70B expected
- Cleveland Fed median m/m CPI +0.4% vs +0.5% prior
- Biden: For the past three months, annualized inflation is 1.8%
Markets:
- WTI crude up 73-cents to $78.14
- US 10-year yields down 12 bps to 3.72%
- Gold up $22 to $1898
- S&P 500 up 14 points to 4004
- JPY leads, USD lags
There's a simple and a less-simple explanation for the price action on Thursday.
The simple one is that CPI was benign enough. The fall to 6.5% y/y inflation was in line with estimates and that's good enough to rule out a 50 bps hike on Feb 1. To support that, the implied odds of 50 in the Fed funds market fell to just 8% from 25% earlier this week.
The dollar was brutally choppy after the release but it ultimately turned lower, particularly against the euro.
However the euro wasn't the top performer -- not by a long shot -- that honor belongs to the yen, which was sizzling and brings us to the second explanation. A report in Japan indicated the BOJ is more worried about financial risks around YYC and the market is now heavily speculating that it could come to an end or be materially altered at next week's meeting. That sparked a big rally in the yen that extended through Europe and into US trading.
The BOJ shift also makes holding Japanese bonds particularly perilous and I expect there was heavy selling today into the BOJ's barrier. That money likely flowed into Treasuries and is what sank yields 10-15 bps across the curve. That may have created a feedback loop towards more bond buying on the break of 3.50% in 10s and to USD selling and equity buying.
If that's the case, we'll see much more volatility around next week's BOJ decision and, in any case, that's an event that should be circled on your calendars.
In terms of levels, USD/JPY selling picked up on the break of the Jan 3 low as the pair fell to the lowest since May.
A number of dollar pairs also broke out including EUR/USD, AUD/USD, USD/CAD and gold.
The euro side of the equation wasn't just about the dollar either as EUR/CHF attests to. The market is warming up to the idea that 2023 won't be such a rough year in Europe after all and European stocks have been relentlessly bid this year.
