Ahead Today
G3: US Core CPI, NFIB Small Business Index
Asia: China Exports
Market Highlights
The Dollar strengthened, equity markets sold off, while US Treasury yields rose with some bear-flattening in the US rates curve. This was driven in part by renewed tensions between US and Iran and with that higher oil prices, and also some sell-off in some technology names including from South Korea.
More importantly, Fed Governor Christopher Waller delivered a hawkish message yesterday, saying that the Fed may need to raise rates in the near-term if we get another hot reading on core inflation. He also said that for him to be more comfortable over the trajectory of inflation, we would need to see several months of lower readings to feel that inflation is moving in the right direction, and that the Fed needs to avoid repeating mistakes from the pandemic when the US central bank took too long to raise rates, even as he highlighted differences between the COVID period and right now. The combination of these factors resulted in US 2-year yields in particular rising further to 4.28% with the Dollar also stronger.
Governor Waller’s remarks in providing more details on the Fed’s reaction function are also very interesting in the broader context of Fed Chair Kevin Warsh’s push to the Fed to rely less on forward guidance. For those of us who are married, the analogy I have in my mind is that our spouses may not tell us explicitly what he or she will do, or whether he or she will eventually be happy with our actions (this is akin to the Fed not saying whether they will change rates in the future or not). Nonetheless, as long as we understand our spouses’ “reaction function”, we will get a good sense of whether our actions will elicit some response down the road (and again this is akin to whether the Fed will change interest rates depending on inflation and macro scenarios). Whether this is exactly how Fed Chair Kevin Warsh wants to operationalise this concept in practice remains to be seen, but we could see how this new regime may work while managing the downsides of forward guidance we have seen especially during the COVID pandemic.
Tonight’s US CPI numbers will as such take on greater importance than usual and especially the core inflation numbers. Our US team is calling for a 0.24% mom rise in US core CPI, and from a market perspective any upside surprise on this front may lead to the market further cementing US rate hike expectations (and vice versa of course).