Markets are getting cautious ahead of tomorrow’s US CPI



Overview: The euro came back offered after its seemingly inexplicable advance yesterday. The dollar is stronger against most major currencies today, with the yen being an exception after holding 114.00 JPY on yesterday’s advance. Most emerging market currencies are also weaker, with a handful of smaller Asian currencies proving a bit resilient. Most of the major stock exchanges are advancing in the Asia-Pacific region except Japan and Australia. The European Stoxx 600 is stable after falling late yesterday as US futures point to a softer open. After rising over the past three sessions (~ 18bp), the 10-year US Treasury yield is consolidating, fluctuating slightly below 1.5%. European rates are down 3 to 5bp. Gold is little change. This week’s calm tone contrasts with the sharp moves in Bitcoin and Ethereum. Oil is consolidating after the three-day advance that pushed January’s WTI up about 8.5%. US and European natural gas is also weaker after the rally in recent days. Iron ore, which rose more than 10% in the first two sessions of this week, edged down yesterday and is down 3% today. Copper’s three-day rally is under threat.

Asia Pacific

Number of countries participating in diplomatic boycott of Beijing Winter Olympics increases. In addition to the United States, Lithuania, Australia, New Zealand, Canada and the United Kingdom have joined. While this may annoy Chinese officials, it is symbolic. Given China’s quarantine protocols, many diplomats weren’t going to attend in the first place. In addition, the impact on human rights in China is likely to be negligible. Moral righteousness is a signal for national constituencies. However, the treatment of the Peng Shuai and the imprisonment of journalists needlessly upset the already precarious situation.

Consumer inflation in China rose less than expected while producer prices rose more. Due to a jump in vegetable prices (30.6%), the CPI for November was up 2.3% from a year ago. The median forecast (Bloomberg survey) was for an increase of 2.5%. This is the fastest pace since August 2020. The fall in pork prices (-32.7% year-on-year) is slowing. Excluding pork, the CPI would have increased by 3%. Prices for services remain low. Excluding food and energy, the core CPI is up 1.2% compared to last year (1.3% previously). Producer price inflation slowed from 13.5% in October to 12.9% in November. Economists expected a rate of 12.1%. Those responsible for the recall decided to increase supplies, including coal, helping to ease strong upward pressures.

Officials have taken a more pro-growth stance, meaning that inflation will not stand in the way of further easing of monetary policy (via reserve requirements, even if not interest rates) next year. Meanwhile, Evergrande and the Kaisa Group officially defaulted on debt service payments on dollar bonds. Yet, unlike the end of the housing bubble in the United States and Europe, China is forcing banks to continue lending. This keeps the proverbial treadmill running. The November loan figures, released today, illustrate this. New yuan loans, which follow bank loans, rose more than 50% to CNY 1.27 trillion, from CNY 826 billion in October. Global funding, which adds parallel banking activity to bank loans, increased from CNY 1.5 trillion to CNY 2.61 billion. Note that just before publishing this report, the PBOC announced a two percentage point increase in reserve requirements for foreign currency deposits. This will likely weigh on the yuan at first.

Weekly flows in the Japanese portfolio have been unusually large last week. Data from the Ministry of Finance showed that Japanese investors were big sellers of foreign bonds for the second week in a row. Sales of JPY 1.18 trillion followed the divestment of JPY 1.34 trillion the previous week. It was the best-selling in two weeks since February. From a high level, most of last week’s sales did not require a net purchase of the yen as Japanese investors mainly turned to foreign stocks, grabbing JPY 1.2 trillion. This is the highest figure since the start of the time series in 2005. Meanwhile, foreign investors bought JPY 2.2 trillion in Japanese bonds, which appears to be the second highest on record (after 2 JPY 57 trillion purchased in early July). For the third week in a row, foreign investors were small sellers of Japanese stocks.

The dollar approached 114.00 JPY yesterday and fell back to 113.35 JPY today. The JPY114 area is “defended” by a $ 2.2 billion option at JPY 114.10 which expires today and a $ 1.15 billion option at JPY 114.25 which expires tomorrow. A breakout of JPY113.25-JPY113.35 could signal a test on JPY113.00, but the market will likely be cautious ahead of tomorrow’s US CPI report. The Australian dollar’s rally weakened earlier today to slightly above $ 0.7185, the 20-day moving average, which it has not traded above since November 4. The first retracement (38.2%) of this week’s rebound is near $ 0.7115, but initial support is visible in the $ 0.7140 area. The greenback edged down against the Chinese yuan (~ CNY 6.3430) before stabilizing and rising slightly. He is caught between two big options which expire today. One set costs around $ 2.5 billion at CNY 6.34, and another set costs around $ 950 million at CNY 6.35. The PBOC’s benchmark rate for the dollar today (6.3498 CNY) was the biggest deviation from the median projection (Bloomberg, 6.3467 CNY) since mid-October.


Germany’s October trade figures may be too old to have a significant impact on the market, but growth in imports and exports is a constructive development. The 4.1% increase in exports, the highest since July 2020, was well above expectations, as was the 5% increase in imports (most since August 2020). For Germany, this translates into a lower than expected trade surplus (12.8 billion euros). The average monthly surplus this year through October is 15.5 billion euros, which is slightly higher than the average for the same period last year (14.4 billion euros), but excluding average in 2019 (until October) of 19 billion euros.

In the wake of the “party-gate”, British Prime Minister Johnson announced Plan B in the face of the new wave of infections calling on people to work from home again. He created a lot of fury. Businesses have asked for more government support and unions want the leave program reinstated. Any lingering ideas of a rate hike next week by the Bank of England have vanished. The next-due pound sterling interest rate futures contract has the lowest yield (11bp) in three months.

Short hedging appeared to take the euro to $ 1.1355 yesterday, and it stabilized above its 20-day moving average for the first time since November 3. However, this was not the harbinger of a breakout, and the euro’s gains are squeezed today. Initial support is around $ 1.13 and then in the $ 1.1275 area. The British pound set new lows for the year yesterday slightly below $ 1.3165, the retracement (38.2%) of the rally from the March 2020 low. Today it sits in a range below a quarter of a cent capped at nearly $ 1.3215. It consolidates weakly. There are options at $ 1.32 that expire today (~ £ 370million) and tomorrow (£ 600million) which are likely to be neutralized.


The United States reports weekly initial jobless claims, wholesale trade and inventories, as well as third quarter household net worth. They are not market drivers, especially today. Instead, investors will likely focus on equities while waiting for tomorrow’s CPI. US inflation continues to accelerate and the headline CPI is expected to move closer to 7%, setting the stage for a hawkish FOMC meeting next week. An acceleration of the reduction and more public servants will likely see the need for more increases. Recall that in September, the last time officials updated their forecasts, half did not see the need to hike rates next year. The market has done much of the heavy lifting for the Federal Reserve. The implied yield on the December 2022 federal funds futures contract has increased by around 50bp since the September FOMC meeting.

The Bank of Canada left its policy on hold yesterday, as widely expected. However, the market was disappointed that it did not update its forecast to reflect the strong data. The swap market is forecasting five hikes over the next 12 months, and the central bank has said nothing to encourage such an aggressive stance. This leaves the Canadian dollar somewhat vulnerable, we believe.

Brazil did not disappoint. The central bank raised the Selic rate by 150bp for the second month in a row and signaled another hike of the same magnitude in February when it meets again. He raised the Selic rate by 750bp this year. It is driven by rising inflation and the economy contracted in the second and third quarters. The Selic rate is 9.25%. The IPCA inflation measure is expected tomorrow, and is expected to rise to 10.9% (Bloomberg survey) from 10.67% in October.

Peru is expected to raise its benchmark rate by 50bp to 2.5%. It would be the third 50bp in a row. Its November CPI, published at the start of the month, is slightly above 5.6%. Mexico is releasing its November CPI figures today. It is expected to rise from around 6.25% to 7.25% and set the stage for another 25bp hike next week in the overnight rate to 5.25%.

The US dollar is trading strongly against the Canadian dollar, and heavier stocks could help. While initial resistance is seen near CAD1.2700, we believe there is a margin towards CAD1.2730-CAD1.2750. The greenback fell to near 20.8860 MXN yesterday, its lowest level since November 23, and the five-day moving average fell below the 20-day moving average for the first time since the start of last month. The move appears to have worn off, but the dollar needs to resurface above the MXN21.05 area to build confidence that a lower is in place.



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