Overnight Headlines

*Japan November wholesale inflation spikes on rising raw material costs

*Dollar firms ahead of US inflation data, PBoC clips yuan’s wings

*Biden administration signals CPI data could be high  

*Asia stocks fall on renewed concerns over Evergrande and Omicron

USD strengthened, underpinned by haven demand. But the DXY is stuck in a range trading just above 96. EUR is similarly rangebound for now, trading around 1.13. GBP rebounded mildly from the lowest level of the year to close at 1.3221. JPY outperformed on a flight to quality though USD/JPY traded in a narrow range. Commodity-$s gave back some gains after a good start to the week.

US equities moved from gains to losses as investors feared potential restrictions could derail the economic recovery. Defensives outperformed cyclicals, with healthcare strong and tech leading the selloff. The Dow closed flat, the tech-heavy Nasdaq -1.7%. Asian markets are in the red and European futures are also lower.

Market Thoughts – Inflation, inflation, inflation

Today’s main event will be the release of the US CPI data. The headline number is expected to increase to 6.8% y/y in November. This overtakes a 6.2% increase which was the fastest gain in 31 years. Another high print is forecast in the core reading at 0.5% m/m, after the October rise of 0.6%.

Some estimates put the headline above 7%, unheard of since 1984. There may be an initial binary reaction, as anything above 7% will drive an instant risk-off move, with anything below sparking relief. Whatever the data, recent comments from Fed Chair Powell that inflation may not be transitory highlight risks ahead of next week’s FOMC meeting.

Worth noting is that base effects will bring down the numbers in time, though they will still be elevated. Some are also speculating that bottlenecks in the supply chains may be peaking, also helping inflation come lower into the new year.

Chart of the Day – DXY trading sideways

The dollar remains in (bullish) consolidation mode after its recent gains. DXY pushed lower to 95.51 at the end of November. Prices have been supported by the 21-day EMA and have been oscillating around the halfway point of the 2020/2021 move at 96.10.

Seasonal trends are not always supportive of the greenback through December. But any hawkish change by the Fed and into 2022 may see a renewed push higher. Bulls will aim for 96.59 with the cycle high at 96.93 in the near distance.