Subdued Trade As CPI Looms

WHERE WE STAND – Something of an odd day, yesterday, with markets by and large relatively quiet, as participants continued to digest the latest developments on the trade front, while also looking ahead to today’s US CPI figures.

Markets, consequently, spent most of the day meandering along – stocks trading as near as makes no difference flat; Treasuries grinding lower led by the long-end of the curve amid a repricing of inflation expectations; and the dollar drifting a touch lower, dipping below the 108 figure, per the DXY, as NY trade progressed. Fundamentally, though, the price action brough along nothing to alter my existing biases, of being bullish USD, and bullish equities, continuing to seek dip buying opportunities in both.

For the benefit of infrequent readers, that bullish USD view is supported by my stance that the present US economic outperformance should continue for the foreseeable future, along with the idea that it remains difficult for participants to sit in USD shorts when the degree of policy, and trade, uncertainty remains so high. Equities, meanwhile, should continue to trade higher in relatively choppy fashion, as the aforementioned solid economic growth, and resilient earnings growth, combine to see the path of least resistance lead to the upside, albeit with higher vol amid the absence of a ‘Fed put’ this year.

Speaking of the Fed, we heard from Chair Powell yesterday, in the first of two days of Congressional testimony. His remarks, though, broadly mirrored those given at the January FOMC press conference a fortnight ago, with Powell reiterating that the Fed need not hurry to adjust rates, with policy being well-positioned for the risks and uncertainties facing the economic outlook, as policymakers remain attentive to risks on both sides of the dual mandate.

Yesterday also brought remarks from BoE Governor Bailey, who waffled on financial stability, and from external MPC member Mann who, somehow, managed to sound hawkish when explaining why she dissented in favour of a ‘jumbo’ 50bp cut last week. Essentially, the nub of Mann’s argument was that a larger move was needed to send a strong signal about the appropriate Bank Rate level and anchor inflation expectations, but that she favours maintaining policy restrictiveness in the future. Not sure that’s a circle I’m able to square, but suffice to say it doesn’t seem as if Mann will be maintaining her dovish stance for particularly long.

In any case, the UK continues to face a ‘stagflationary’ economic backdrop, meaning I still see little – if anything – to like about either the GBP, or Gilts. Incidentally, cable slipped to fresh 1-week lows yesterday, though the bears will really want to see a close below the 1.23 figure to strengthen downside momentum.

Elsewhere, despite hitting fresh record highs early in the session, gold subsequently pulled back below the $2,900/oz mark. It’s too early to definitively say that the yellow metal has lost its shine, with yesterday’s move looking more like profit taking than anything else. Amid continued haven demand, upside inflation risks, and solid momentum, the bull case for bullion remains a solid one.

LOOK AHEAD – The data docket, finally, gets rather busier today.

January’s US CPI figures will be the main event, with headline prices seen rising 2.9% YoY last month, unchanged from the pace seen in December, while core CPI is expected to dip to 3.1% YoY, which would be the slowest annual pace since April 2021. That said, it’s tough to imagine the figures materially moving the needle in terms of the Fed policy outlook, with policymakers not only seeking a large body of evidence of the disinflation trend continuing, but also likely preferring to sit on the sidelines for now, to assess the macroeconomic impacts of Trump’s trade policies. Of course, the January CPI figures will not account for any tariff-related impact, further lessening their significance.

Besides inflation, Fed Chair Powell will give a second day of testimony on Capitol Hill today, this time to the House Financial Services Committee, though remarks are set to largely mirror those given yesterday. Fed Governor Waller, and non-voter Bostic, as well as the ECB’s Elderson and Nagle, are also due to speak throughout the day.