Overnight Headlines

*Asian stocks fall as markets wary ahead of key US CPI data

*Japan Finance Minister warning offers yen only brief respite

*DXY above 100, euro hovers below 1.09 before Thursday’s ECB meeting

*Gold threatens upside breakout, jumping to $1970 before retracing

US equities traded lower with growth stocks suffering and indices closing near the lows of the day. All 11 sectors in the S&P500 fell. Bond yields continue to advance higher with the US 10-year Treasury breaking long-term trendline resistance to new three-year highs this morning above 2.82%. Real yields are moving closer to positive territory. Asian stocks are down though China stocks gained ground as signs emerged that some of the restrictions were starting to ease across the country. US futures are marked down.

USD is trading just above 100 on DXY as higher bond yields support the greenback. Last week’s near two-year high is at 100.18.  JPY bore the brunt of the losses versus the dollar making new cycle highs at 125.77, its highest since June 2015. EUR was buffeted by politics, unable to hold onto gains. This came after its mini relief rally after Macron beat Le Pen in the first round of French presidential voting. GBP is holding above support around 1.30. UK unemployment dropped to 3.8% as expected this morning. AUD and NZD continued to fall as the commodity rally eased.

Day Ahead – Red hot US CPI

It’s all about CPI data and the impact on bond markets currently. We get March inflation figures from across the globe this week including readings for Norway, India, the UK, Argentina and Sweden. China released their consensus beating figures yesterday. A synchronised upswing is expected in all cases.

Today sees the most important with the US print likely rising to 8.4%, due to mainly a jump in commodity prices. But core inflation also probably rose further, pushing up to 6.6% from 6.4% in February. The gap between the main headline number and core CPI is a growing issue for the Fed. Rising prices due to supply chain bottlenecks and Russian sanctions are not within policymaker’s control. But the higher headline print will trigger calls for more aggressive rate hikes. There is around an 85% chance of a 50bp hike priced in to the FOMC next meeting.

Chart of the Day – USD/JPY pushes up to 2015 highs

The FX pair most affected by the move in bond markets has been USD/JPY. Multi-year highs are in play, and this is now getting the attention of the Japanese authorities. Overnight, the government was said to be closely watching the yen. The finance minister also stated that excess volatility and disorderly movements could have an adverse effect on the economy and financial stability. We are watching this jawboning closely, as this hasn’t been seen for many years. But 130 is meant to be the first major level for any possible action.

Very high US inflation is set to reinforce expectations for aggressive Fed tightening. At least two 50bp rate hikes at the next meetings are not fully priced in by markets. A break above resistance at 125.86 would see bulls targeting 127.33 and 127.95 ahead of the 129.07 May 2002 top. Initial support is 125.11 with fresh buyers at 123.67/75.