Headlines

* Dollar eases as inflation in focus, BoJ Governor nomination finalised

* US, China diplomats weigh meeting after spy balloon drama

* Traders bet Ueda-led BoJ will soon abolish yield curve control

* Asian stocks mixed, US futures similar, yen partially recoups losses

FX: USD remained contained in its 103-103.96 range as markets await the latest US CPI report. The longer the DXY trades within small ranges, the stronger the range expansion and breakout should be. The benchmark US Treasury 10-year yield posted a new cycle high last seen at the start of January. But the 100-day SMA at 3.74% acted as resistance.

EUR dipped to a new low for the move at 1.0655 before rebounding. The major has been trading around its 50-day SMA, currently at 1.0715 in recent sessions.  The European Commission now expects the region to avoid a technical recession. GBP closed 0.68% higher at 1.2141. Cable has seen a small bid this morning on the upbeat employment data. Wages rose quicker than expected heaping pressure on the BoE to deliver another rate hike next month. USD/JPY traded to a one-week high of 132.90. But it has slid below its 50-day SMA at 132.04 this morning. The Government’s BoJ nominations have been widely telegraphed. AUD gained 0.69% to close just below 0.70. USD/CAD consolidated Friday’s drop after a bumper Canada jobs report.

Stocks: US equity optimism returned with cyclical growth companies leading the way. This came after Wall Street last week recorded their biggest five-day decline in two months. The S&P 500 closed 1.1% higher with all sectors, except energy, in the green. The tech-laden Nasdaq jumped 1.61%. The Dow added 1.1%, closing on its highs. This is just below the mid-August peak which has acted as resistance previously.

Asian stocks eventually traded mixed with a small positive bias after the solid handover from the US. The Hang Seng was lacklustre amid the surveillance balloon tension and the PBoC’s liquidity drain. The Nikkei 225 was mildly better bid. This was after GDP data showed Japan’s economy returned to growth, albeit at a slower-than-expected pace.

US equity futures are flat to slightly lower. European equity futures are pointing to a similarly flat open. The cash market closed up 1% yesterday. The UK’s FTSE 100 is set to open at a new record high.

Gold trades around its 50-day SMA at $1857.

Day Ahead – “Disinflationary process” to slow?

The US CPI report remains arguably the most important data point on the calendar with both policymakers and traders fixated on elevated price pressures. Although the downtrend from the June peak of 9.1% is expected to continue, the pace of the decline may slow and bolster thoughts of “sticky” prices. This kind of resilient inflation may hurt stocks and boost the greenback as more rate hikes are potentially priced in.

The consensus forecast for the annual headline print of 6.2% would be the slowest inflation print since October 2021. But it would represent the smallest drop from the prior month since September. If the monthly hits 0.5%, that would be the highest rise in three months. Core inflation is seen falling to 5.5% y/y in January from 5.7% previously, though stronger used car prices and rents are forecast. These two heavyweight components are key to prices dropping through this year.

But markets have been placing bets in recent weeks that inflation will not come down fast, especially since the blowout NFP data. The terminal rate is now seen around 5.2% up from below 5% a month ago. There are no rate cuts priced in this year. A strong CPI should push the peak above 5.25%, boost the dollar and hit stock markets. That said, it does seem like everyone is expecting a strong report and an inline one would disappoint.

Chart of the Day – Will resistance on the Dow hold?

It’s been a bumper start to the year for stocks. But the Dow, which has less growth companies in it, has lagged the tech-heavy Nasdaq. We have highlighted the August top as resistance on numerous times in our weekly webinar. The level (34,281) has capped the upside on several occasions already since the end of November. The mid-December spike top at 34,108 failed to close above here.

Today’s CPI data could go long a way to deciding if bulls can break this level or not. Bullish momentum has picked up marginally. The 50-day SMA at 33640 has lent support to buyers. An upside breakout will need to close decisively above the December high to encourage more buying.