Headlines

* US inflation set to have fallen to slowest pace in more than a year

* BoJ to inspect side effects of ultra-loose policy, yen climbs

* Euro bulls sees US CPI as catalyst for push toward 1.10

* Gold firm as dollar eases, oil steadies after five days of gains

FX: USD was little changed ahead of the US inflation report due in a few hours. The DXY traded within another narrow range for a second day. In fact, it was another inside day. Prices are hovering just above the 103 level.  Treasury yields fell back giving up all of the prior day’s gains. The 10-year yield, seen as a proxy for borrowing costs around the world, trades at 3.53% this morning. The recent low is at 3.50%.

EUR traded to a fresh seven-month high of 1.0776, It closed at 1.0755 as several ECB speakers echoed the need for further significant rate hikes. GBP traded in a relatively quiet fashion. It printed a doji candle closing largely unchanged at 1.2151. USD/JPY finished 0.17% higher at 132.47. But there has been yen buying this morning pushing the major below 132 on the back of the BoJ story. AUD continue to consolidate with another inside day. It looks like bullish consolidation. The cycle high is at 0.6949. USD/CAD printed a doji and is lingering above 1.34.

Stocks: US equities continued to climb as investors bet that the Fed could slow its rate hikes and pause soon. The blue-chip S&P 500 gained 1.28% with all 11 sectors higher. It marked the first time in about three weeks the index had notched back-to-back daily gains. The tech-heavy Nasdaq gained 1.76% to notch a four-day win streak. That’s its first one in four months. The fall in yields helped relative outperformance in tech names. The Dow finished higher, up +0.80%.

Asian stocks traded mixed as major indices failed to sustain the early bullish momentum from Wall Street. The HSI swung between gains and losses. Participants digested mixed inflation data from the mainland. CPI matched estimates but factory gate prices fell more than expected.

US futures are flat. Futures in Europe are indicating a higher open +0.4%.  The cash market closed up 1% yesterday.

Gold printed a doji candle yesterday but made a fresh cycle high at $1886. Buyers are in this morning as the precious metal gains from a contained dollar.

Day Ahead – CPI Thursday

All good things come to those who wait. It’s finally time for the key data point on the calendar. The US CPI should tip the balance for the FOMC in deciding whether to hike by 25bp or 50bp at its meeting on 1^st February. Money markets price in around 32bps so roughly a 78% chance of a 25bp hike. It will also drive risk taking and dollar direction for the next few weeks at least.

Economists are virtually unanimous in expecting a further drop in the data. The headline is seen falling to 6.5% y/y and 0% m/m. That annual figure would mark the lowest reading in 13 months and sixth consecutive fall. The core, which is unaffected by falling gasoline prices, is predicted to drop to 5.7% from 6% in November. The monthly number is forecast at 0.3%, supported by services inflation.

Markets are relatively defensively positioned. But sentiment is definitely tilted to a low print after a range of other data suggested that inflation has peaked. This should mean inline data allows the risk rally to continue. Higher readings will be the bigger shock and spark greater volatility, at least in the short term. That entails lower equities and the dollar higher. Bloomberg highlight that in the 12 CPI days last year, the S&P500 swung by an average of 1.9% in its first trading day of reaction. That’s nearly three times as big as the average such move over the previous five years.

Chart of the Day – USD/JPY’s bearish channel

It could be a double whammy for USD/JPY. US CPI will be a huge mover and we’ve had news overnight about more potential tweaks to BoJ policy. After December’s widening of the 10-year JGB yield target, expectations are growing that the band will be broadened again. The next Boj meeting is next week. Investors are smelling blood as yields press to the topside of the new band. Focus on the exit of ultra-dovish Kuroda in April and of QE is building into a momentous event.

The major will also be affected by the dollar and yield move after today’s US CPI data. The 10-year Treasury yield is closely correlated, with strong support at 3.50%. USD/JPY has been in an impressive downward channel since its multi-year peak at 151.94. Intervention by the Japanese MoF saw that top fade. The big red candle in November was on US CPI falling below 8%. We are currently trading on the midpoint of last year’s rally at 132.70. The cycle low sits at 129.50. Resistance comes in at 134.45/77. A death cross is near with the 50-day SMA touching the 200-day SMA.