Consolidation was the name of the game early in the day, as market players were biting their nails ahead of the U.S. CPI release.
Volatility picked up much later on, leading to diverging price action among higher-yielders, as individual catalysts also came in play.
Here’s how asset classes reacted to the inflation figures and other major headlines.
Headlines:
- Japan’s preliminary machine tool orders up 4.7% y/y in January (previous reading upgraded from 11.2% to 12.7%)
- BOJ Governor Ueda warned that higher food prices and int’l tariffs may impact inflation expectations
- API crude oil inventories up by 9.043M barrels (2.8M forecast)
- ECB official Villeroy warned that U.S. tariffs will have negative impact on economy
- ECB official Holzmann also noted that inflation is under threat due to potential tariffs
- U.S. headline CPI up 0.5% m/m (0.3% forecast, 0.4% previous); annual headline CPI up from 2.9% to 3.0% y/y vs. expectations of no change; core CPI up 0.4% m/m (0.3% forecast, 0.2% previous)
- Fed Chairperson Powell reiterated that underlying economy is very strong and that they are watching the core PCE price index more closely
- U.S. EIA crude oil inventories up 4.7M barrels (2.4M forecast, 8.7M previous)
- FOMC official Bostic: Labor market is doing incredibly well, latest inflation data suggests more careful monitoring needed
- ECB official Nagel: Gradual approach more appropriate as they approach neutral level of rates
- BOC Summary of Deliberations: Trade conflict with U.S. will permanently cut level of GDP, uncertainty to cause damage even with no tariffs imposed
- Trump talked about pushing for peace between Russia and Ukraine, planned on signing reciprocal tariffs within the day
Broad Market Price Action:
Dollar Index, Gold, S&P 500, Oil, U.S. 10-yr Yield, Bitcoin Overlay Chart by TradingView
Financial markets waited nervously for the latest batch of U.S. inflation figures during the first couple of trading sessions, although crude oil experience some downside pressure on account of a build in API stockpiles.
In addition, expectations that Russian oil will soon begin to flow freely back in global markets also spurred higher supply forecasts. Still, the OPEC kept its demand estimates for this year and the next unchanged.
Gold also started to edge lower leading up to the U.S. CPI release but soon popped sharply back up, despite stronger than expected results. Treasury yields also zoomed up and held on to their gains for the rest of the session, shrugging off cautious remarks from Fed head Powell.
On the flip side, U.S. equities dipped upon seeing hotter inflation figures, as this dampened the odds of lower borrowing costs down the line. Both the Dow and S&P 500 index closed in the red, but the Nasdaq managed to squeeze out some gains thanks mostly to yet another positive run by Meta shares.
FX Market Behavior: U.S. Dollar vs. Majors:
Overlay of USD vs. Major Currencies Chart by TradingView
Majority of dollar pairs started the day in tight ranges ahead of the U.S. CPI release, with the exception of USD/JPY which crawled higher early in the Asian session after hearing less hawkish remarks from BOJ Governor Ueda.
The rest of the majors saw increased volatility a few hours into the London session, with the commodity currencies on the back foot while European currencies raked in some gains versus USD. The actual U.S. inflation report printed stronger than expected headline and core data, reflecting sticky price pressures that appeared to weigh on Fed easing expectations.
USD faded some of its post-CPI gains right ahead of Fed head Powell’s testimony, which then spurred another turn lower for the U.S. currency, except against the weaker yen. By session’s end, the U.S. dollar closed with marginal gains against most of its peers while seeing slight losses versus EUR (-0.25%) and CHF (-0.01%).
Upcoming Potential Catalysts on the Economic Calendar:
- New Zealand quarterly inflation expectations at 2:00 am GMT
- U.K. quarterly and monthly GDP at 7:00 am GMT
- U.K. goods trade balance and industrial production at 7:00 am GMT
- Swiss CPI at 7:30 am GMT
- Eurozone industrial production at 10:00 am GMT
- U.S. headline and core PPI at 1:30 pm GMT
- U.S. weekly initial jobless claims at 1:30 pm GMT
- New Zealand BusinessNZ manufacturing index at 9:30 pm GMT
The market spotlight could stay on inflation data for today, as New Zealand gears up to release its quarterly inflation expectations data during the Asian session, followed by Switzerland’s monthly CPI during London market hours.
Uncle Sam has the producer price inflation report coming up later in the day, likely adding perspective to the latest batch of CPI figures and possibly influencing overall risk sentiment as well.
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