Asia FX Talk - Inflation expectations ticked up

Near-term inflation expectations in the US ticked up, although longer-term inflation expectations remained reasonably anchored

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Ahead Today

G3: Germany ZEW Expectations, US NFIB Small Business Optimism, US PPI

Asia: India WPI

Market Highlights

Fed Vice Chair Jefferson said that the policy rate should remain in current restrictive territory considering the slowdown in progress of inflation reduction. Meanwhile Fed Governor Michelle Bowman said she doesn’t expect it will be appropriate for the Fed to cut interest rates in 2024, pointing to persistent inflation in the 1st several months of the year. In line with that, we are seeing some signs that near-term inflation expectations in the US is ticking up. A New York Fed survey released yesterday showed consumers expect prices will climb 3.3%, up from 3% previously, while the University of Michigan survey showed 1-year inflation expectations ticking up to 3.5%, even as longer-term inflation expectations remain reasonably anchored.

Markets are reasonably unchanged across the board, save for a 74% surge in GameStop post a cryptic social media post. The key datapoint would be tomorrow’s US CPI print, and markets are waiting for better clarity from that.

Regional FX

Regional FX

Asian FX generally traded mixed to weaker yesterday, with PHP (-0.83%) and IDR (-0.22%) the key underperformers. The sharp weakness in PHP could have been due to expectations by some market participants that the central bank could turn meaningfully dovish in its meeting this week due to weaker 1Q GDP growth data. We lean towards disagreeing with those views. First, while consumption and investment were weaker on a year-on-year basis, on a quarter-on-quarter basis, they were still in line with historical norms. Second, inflation is still reasonably sticky, even as it has shown progress from last year. Third, turning dovish could result in more PHP weakness and result in FX pass-through to inflation. We think that BSP could start to intervene if USDPHP spikes sharply closer to the 58 or 59 levels. Meanwhile, China will issue 40 billion yuan ($5.5bn) of 30-year bonds Friday, the 1st of a planned 1 trillion yuan of ultra-long debt.

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