UPCOMING EVENTS:

Wednesday: UK CPI.

Friday: Japanese CPI.

The last week we got again a CPI report beating forecasts and inflation expectations in the UMich Survey rising. This of course is far from what the Fed wants to see at this point, and it bodes poorly for the markets going forward. After an initial dip on the CPI release, we saw an incredible “squeeze” which had no reasons whatsoever. The day after though the market started to fade the odd reaction to CPI and extended as UMich Survey indicated rising inflation expectations and Fed members kept their hawkish stance with Bullard touting a higher year end rate which would translate in a 75 bps rate increase in November and December.

This week there’s nothing on the calendar that could change what we saw the last week and it’s the last week when we will get some Fedspeak before the blackout period starts on Saturday. So, we will pretty much trade into the next FOMC meeting knowing that there’s much more probability of a more hawkish Fed than that of a Fed throwing the markets a bone (which has been market’s illusion anyway). The Fed wants slower growth, higher unemployment, and tighter financial conditions. Don’t fight it. The US Dollar is still the best place to be in the major currencies space.

On Wednesday, we will get the latest UK CPI report, which is expected to climb to 10.1% on the Y/Y figure from the prior 9.9% and the Core data to rise to 6.4% from the prior 6.3%. The report is not expected to change the expectations for a big BoE rate hike (75 or 100 bps) at the November meeting as Bank of England Governor Bailey indicated at the International Monetary Fund event in Washington. Their previous disappointing hike at the September meeting was one of the reasons for the GBP fall which of course got exacerbated by the fiscal package announcement. The markets want to see clear commitment in inflation fighting as this is the time to go big or go home.

On Friday, we will see the latest Japanese inflation report which is expected to climb to 3.1% for the Y/Y figure from the prior 3% and to 2% from the prior 1.6% for the ex-Food and Energy data. The inflation picture in Japan is very different from its Western peers and it’s unlikely to trigger a response from the BoJ (as it has already signalled) at their next meeting in November although there’s a growing expectation that the BoJ sooner or later will have to fold.

This article was written by Giuseppe Dellamotta.