All eyes on U.S. inflation figures

14 February, 2018

All eyes on U.S. inflation figures

After wiping off more than $5 trillion in market cap past week and volatility hitting the roof, global equities are finally showing signs of stabilization. U.S. stocks continued to recover from the correction levels on Tuesday with main indices posting a three-day winning streak. Confidence was restored yesterday, after the new Fed Chair Jerome Powell declared that the central bank would keep watching for financial stability risks.  Meanwhile, Asian equities were mixed today with shares rising in Hong Kong and Seoul but falling in Japan due to strengthening Yen.

The rising Yen is impressive, especially that we have not seen a run to haven assets. USDJPY hit 106.85 earlier today, a level last seen in November 2016. This came after Japan’s GDP showed economic expansion slowed in the final quarter of 2017, reporting a 0.5% annualized growth from 2.2% in the past quarter. I don’t think these figures justify a stronger Yen. After all, the Japanese economy has recorded its longest expansion streak in almost three decades, and despite the slowdown, consumption is now contributing a significant portion to growth, which is good news.

The BoJ will probably need to remind investors that the central bank is still far from reaching its inflation target, and thus it’s too early to begin unwinding monetary policy. Today’s comments from Japan’s Chief Cabinet Secretary that stable currency moves were extremely important, failed to drag the Yen, but as we approach 105, I think verbal interventions will become more aggressive.

All eyes on U.S. inflation figures

The U.S. inflation figures release is the key event of the week, if not the month. Investors’ fear of inflation which triggered the global selloff will be tested again today.

Inflation expectations have risen to highest levels since 2014 after U.S. jobs report showed wage growth accelerated at its strongest pace since 2009. While many economists agree that the phase of low prices is behind us, there’s some anxiety that prices might appreciate at a faster pace than previously anticipated.  

Economists expect the annual core CPI has eased to 1.7% in January from 1.8% in December and the headline figure also to decline by 0.2% to 1.9%. If we didn’t see any surprise on this front, markets should relax, stocks will likely spike higher, and the U.S. dollar is likely to give up on recent gains. However, any surprise to the upside, particularly on the Core inflation, will prove economists wrong and lead to higher bond yields and further selloff in equities.

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