Australian dollar jumps with relief rally

DXY was stable last night as markets await US CPI data:

The AUD flew anyway:

Oil is taking a breather. It has run very hard:

Not so the wider commodity bid which resumed its hysteria:

Not miners (LON:GLEN):

EM stocks (NYSE:EEM) did better ad China’s national team buys:

Junk (NYSE:HYG) was very convincing:

The curve flattened again:

Which lifted Growth stocks:

Westpac with the wrap:

Event Wrap

US wholesale Inventories in December was finalised at +2.2%m/m from an initial reading of +2.1%m/m.

FOMC member Bostic reaffirmed his bias for 3 or 4 hikes in 2022 and an early start to balance sheet reduction. He thought inflation would ease to 3% by year end. Mester said: “I don’t think there is any compelling case to start with a 50-basis-point move”.

Germany’s trade surplus in December narrowed to EUR7bn (est. EUR11bn, prior 11.6bn), due to a surprising rise in imports of 4.7%m/m (est. decline of -2.1%m/m).

ECB member Schnabel highlighted the risks of higher inflation for longer than anticipated, with the inflation profile remaining highly uncertain. However, the ECB would be gradual and data-dependent in its policy normalisation (as stated by Villeroy the previous day).

BoE Chief Economist Pill delivered a speech in which he stressed his bias for gradual and measured policy adjustment and the need to contain “market expectations of aggressive activism”.

Event Outlook

Aust: February MI inflation expectations will provide timely insight into consumer views on inflation pressures. The 15 January Weekly Payrolls are expected to fall; a trend usually seen throughout the Christmas/New Year period.

India: The Reserve Bank of India will keep their main policy instrument on hold for now to facilitate the economic recovery (market f/c: 4.0%).

US: Price pressures are set to persist in January, holding the CPI at near 40-year highs (Westpac f/c: 0.5%m/m, market 0.4%m/m and 7.2%y/y). Meanwhile, initial jobless claims should also remain at a very low level (market f/c: 230k).

No very convincing market action. Bonds curves and Growth stocks are bettering on waning inflation. Commodities are betting on the opposite. Take your pick.

The AUD is benefitting from the confusion as both bids lift it.

Credit Agricole (PA:CAGR) assesses the CPI:

The US CPI data pack for January will be published on 10 February. We expect another extremely strong inflation release, with headline CPI at 7.3% and core at 6%. These would be the highest levels since 1982. Our take is in line with consensus for headline and 10bp above consensus for core.

The used cars, new cars and energy components still account for the bulk of the inflation overshoot, but the broad-based acceleration in inflation becomes more evident each month, with stronger contributions in food, services and core goods excluding cars.

Like we previously wrote, the fact that US inflation runs at 6%, 7% or 8% does not say much about the persistence of the inflation overshoot. A number of contributions could turn significantly negative next year, namely cars and energy.

That said, the strength in services inflation looks set to be long-lasting (we mean two to three years):

Wages are now running at 4.5% YoY (Atlanta Fed growth tracker).

The past increase in home prices in 2020 and 2021 suggests OER (owners’ equivalent rent) and rents inflation around 5% YoY if not more for a couple of years is largely possible. These two items, which account for 54% of the services CPI basket, suggest services inflation above 4% YoY in 2022 and 2023.

Markets did get oversold short-term so anything but a big number will probably keep the relief rally running for a while longer benefitting AUD for now.

Anything big and the selling returns.