Australian dollar swept away as US inflation storms back

The King is dead. Long live the King!

AUD was monstered:

Oil is hanging on, gold letting go:

Dirt slump:

Mining (NYSE:RIO) woe:

EM  (NYSE:EEM) swoon:

Junk (NYSE:HYG) too:

New depths for US curve inversion:

Stocks giving up the ghost:

The trigger for moves was US PCE which came in far stronger than expected. Goldman:

Personal income increased by less than expected and personal spending increased by more than expected. The saving rate increased to 4.7% from an upwardly-revised 4.5% in December (vs. 3.4% previously). The January core PCE price index rose by 0.57% month-over-month, above consensus expectations and reflecting a boost from start-of-year price increases, and the year-over-year rate increased to 4.71%. Our GS trimmed core PCE inflation measure increased 0.47%month-over-month in January and increased 4.02% from a year earlier. The consumption details were stronger than our previous assumptions and indicate upside to our Q1 forecasts.

The January core PCE price index increased 0.57% month-over-month in January, above consensus expectations and reflecting a boost from start-of-year price increases,and the year-over-year rate increased to 4.71%. Headline prices rose 0.62% (mom) and increased 5.38% from a year earlier. Month-over-month core PCE inflation was revised higher in each of the prior three months (Oct. +0.04pp +0.30%, Nov. +0.06pp to+0.22%, Dec. +0.07pp to +0.37%). Our GS trimmed core PCE inflation measure increased 0.47% month-over-month in January (vs. 0.33% in December) and increased 4.02% from a year earlier (vs. 4.07% in December).

There is some discussion of one-off tax effects but, to my mind, the Fed has pivoted too early and foolishly supported a loosening FCI, especially via booming stocks. As we know, this can and does drive consumption in the US:

Now rates will go higher and, ironically, the only thing that can prevent a stock market crash is a stock market crash.

More to the point, DXY is back big time. Credit Agricole (EPA:CAGR):

With US inflation still untamed, the FOMC will push rates higher by delivering two 25bp hikes in March and in May. A slew of resilient US data has encouraged markets to price in even more aggressive tightening beyond May. This episode has highlighted the dangers of selling the USD based on premature expectations of ‘peak-Fed’. We expect USD weakness this year, but mainly in H223 and once subsiding US inflation and a potential recession point to a pause in the Fed’s tightening cycle and peak-Fed.

Our analysis of the USD’sperformance in the months before and after the peak in Fed tightening cycles since the 1980s shows the USD rallied in the final stages of the tightening cycle before ceding ground once the Fed paused its hikes. The USD gains were most pronounced vs the risk-correlated NZD, AUD and NOK and less significant vs the CAD, the SEK, the JPY and gold. Interestingly, the safe-haven JPY and CHF recoup most of their losses in the months after peak-Fed. So historical evidence suggests that investors should refrain from selling the USD until the Fed ‘tells’ them so by signalling a pause in its tightening cycle.

In the near term, focus will be on the US ISM data as well as Fedspeak as investors look for more clarity on the economic and policy outlook. In addition, the release of the Fed’s monetary policy report ahead of Fed Chair Jerome Powell’s congressional testimony (before the US Senate on 7 March) could attract considerable attention. The USD should continue to benefit from any repricing of future rate hikes.

Likewise, don’t buy AUD until the Fed tells you to.