Overnight Headlines

*Equity and US Treasury futures fall amid talk of faster Fed hikes

*Fed’s Bullard backs supersized rate rises, seeks full point increase by July

*Goldman ups Fed forecast to 7 hikes this year, Citi see 50bp in March

*Lagarde warns ECB acting too fast could choke economic recovery    

*UK GDP rose 7.5% in 2021, fastest pace of growth since 1940

US equities dropped following the hottest US inflation data in four decades. The Dow broke a three-day win streak, falling 1.5% while the S&P500 and Nasdaq declined 1.8% and 2.1%.  Value and defensives offered the best protection while tech and real estate were the laggards. Asian markets are lower with European and US futures firmly in the red.

USD had a volatile ride, initially rising before falling amid expectations of other central banks joining the fight against rampant inflation. The Fed’s Bullard then came to the rescue of the greenback, with talk of an emergency hike gaining traction. EUR printed a high of 1.1494 before falling back and is touching trendline support again below 1.14. GBP made a three-week high at 1.3643 before retracing and USD/JPY got close to the January high at 116.35. NZD looks weak after printing a bearish hammer candle.

Market Thoughts – How much is US CPI going up?

Another dramatic day with stunning US CPI data prompting huge speculation and market moves around even more Fed hikes in the very near future. US inflation is certainly not coming down any time soon close to the Fed’s target of 2% (to answer our question from yesterday) with broad based gains very sticky. Services and rent inflation are at or close to 30-year highs while used car prices increased again.

Markets are close to fully pricing in a 50bp hike by March, up from less than 30% before the data, with 6.5 rate hikes by year-end. Bullard’s broadside and talk of an emergency meeting has also seen markets price in a 5-6bp hike in February. Is this extreme? Certainly, some of the more centrist Fed officials do not see the need for a 50bp rate move (yet) and definitely no emergency hike. That said, the Fed may have trouble walking back markets that are 95% priced for a 50bp March move.

Chart of the Day – USD/JPY breaks higher into previous top

USD/JPY has a strong correlation to US 10-year Treasury yields. These popped higher yesterday through the psychological 2% barrier and are consolidating today above that level. We’ve also had news that the BoJ is affirming its dovish stance by acting to put the lid on bond yields in its government bond market.

After falling to 113.47/48 in January, prices have rebounded strongly finding support from the 50-day SMA. The previous November high at 115.52 held up the advance in late January but yesterday’s surge has taken prices up to the long-term top at 116.35. A strong weekly close should see bulls aim for 118.66. Support is 115.52.