CPI and BoC Eyed

WHERE WE STAND – Nothing much to write home about this morning, with markets having drifted along for most of Tuesday, lacking significant news- or data-related catalysts, as participants continued to play a patient waiting game ahead of the November US CPI figures, due later on today.

As a result, price action during the day took the form of little more than a random walk, with little by way of significant fundamental reasoning or rationale behind most of what was seen.

The move in Treasuries, though, caught the eye, with the long-end selling off as 10- and 30-year yields rose more than 3bp on the day, seeing the curve bear steepen for a second day running. It’s tough to pin this move on a specific narrative though perhaps, at the margin, some pre-CPI hedging might’ve been in the mix.

In any case, the softness in Treasuries was enough to help lift the dollar, as the greenback reclaimed the 106 handle, seeing the DXY notch a 3^rd straight daily gain for the first time in two and a half weeks. I remain bullish on the buck, amid the continued strong US economic backdrop, and continued outperformance of the US economy compared to that of DM peers.

Most other G10s were choppy, albeit a touch softer, on the day, though recent ranges were relatively well-respected.

The AUD sunk to the bottom of the G10 leaderboard, slipping around 0.8% and surrendering the 0.64 handle after a dovish hold from the RBA, where policymakers noted diminishing upside inflation risks, and noted increased confidence in inflation sustainably moving back to target. A 25bp RBA cut in February is now the base case, with futures pricing around a 2-in-3 chance of such an outcome.

Elsewhere, gold gained ground for the second day running, in turn rising north of the 50-day moving average for the first time in a fortnight. That break could entice fresh bulls to enter the fray, with the $2,700/oz figure, then the recent $2,720/oz highs, the next notable upside targets. I’d favour further upside here, though obviously a potentially cooler than expected CPI print is the main risk to that view.

Stocks, lastly, went nowhere particularly fast, though both the S&P 500 and Nasdaq 100 ended marginally in the red. Still, the path of least resistance should continue to lead to the upside, helped by a combination of – strong economic growth, solid earnings growth, favourable seasonals, and the ongoing ‘Fed put’.

LOOK AHEAD – The week should finally get going a little later on today, with a much busier calendar up ahead.

Headline CPI is seen rising 2.7% YoY in November, 0.1pp firmer than the pace seen in October, and set to be the highest level of headline inflation since July. Core CPI, meanwhile, is seen rising 3.3%, unchanged for the third straight month, while both metrics are set to have risen by 0.3% MoM. CPI fixings, which have proved remarkably accurate this cycle, point to headline prices having risen 2.72% YoY.

However, it seems highly unlikely that the print will materially alter the near-term outlook for FOMC policy. A 25bp cut next Wednesday seems locked-in, certainly after the higher than expected 4.2% unemployment rate seen in November, with the labour market, not price pressures, being the primary determinant of policy shifts at this juncture. In fact, S&P 500 options price a daily move of just +/- 0.7%, the smallest such move on ‘CPI Day’ since back in early-2021. This makes sense, considering that we’d need an incredibly hot print (v unlikely) to even slightly shift the FOMC away from a 25bp cut in a week’s time.

Meanwhile, the Bank of Canada are set to deliver a second straight 50bp cut this afternoon, taking rates to 3.25%, as Macklem & Co. continue their rush back to neutral. Said cut, to which markets assign around an 80% chance (with the balance favouring a more modest 25bp move), is set to come hot on the heels of a surprisingly soft November jobs report, where unemployment rose to 6.8%, and earnings growth collapsed to 3.9% YoY.

Key for the loonie will be the BoC’s guidance, and whether policymakers show signs of seeking to slow the pace of cuts as neutral approaches; guidance to this effect could provide some support to the CAD, with a ‘hawkish 50bp cut’ – as counterintuitive as that sounds – my base case here.