It could be time to lay off the USD a
little, but inflation midweek could delay any major correction.
After a week of arguing if the EUR is overvalued and whether the ECB will pinpoint this, we get back to the crux of the matter, which is USD weakness. Across the spectrum, we have seen US Treasury yield pressed back to levels seen in the aftermath of president Trump’s, victory, but we have had two 25bp hikes in the US since then and as such, reflation has been completely priced out and more. Indeed the 2yr is now on par with current Fed funds, so on this basis, another Fed move by year end is also priced out, but futures markets are keeping a 25% probability on the table. We still think at this stage, it is too low.
As in the title, inflation numbers on Thursday will determine whether the odds can improve, and with plenty more data to consider until the December meeting, we see risk to the USD on the upside this week unless there is an outright collapse in CPI – which seems unlikely given extended weakness in the greenback in recent months. Markets will be looking for the headline rate to see a modest pick up from Oil price, but the core rate may dip slightly. In either case, comparative levels of inflation are not as bad as hyped over, given we are not too far off the 2.0% target unlike Europe and Japan say.
Little seen ahead of this other than the JOLTS job openings figure on Tuesday as well as the familiar precursor to inflation in producer prices on Wednesday. On Friday though, we also get retail sales as well as production stats and capacity utilisation. All the above are for Aug and will have some degree of flex (in response) due to seasonal factors – as we saw in the non farm payrolls report.
This post was published at Zero Hedge on Sep 10, 2017.