Markets pause as key US inflation data looms

Trade has been sleepy thus far this Tuesday. Price action in the European equity space has been uninspired (Stoxx 600 flat), while US pre-open markets are also going sideways; E-mini S&P 500 futures are consolidating just below the record levels reached yesterday at 4380 in the mid-4370s and are flat on the day, while the Treasury curve is little changed with 10-year yields flat on the day just above 1.35%. Markets are in wait-and-see mode ahead of one of this week’s key macro events, the release of US Consumer Price Inflation data at 1330BST today. The data is expected to show a moderation in the YoY rate of headline inflation to 4.9% from 5.0% last month, which would be the first decrease in the headline inflation rate since October 2020. This may be framed as supporting the narrative that the recent spike seen in US inflation is going to be “transitory” – a narrative most (70%) Fund Managers now believe according to the latest BoA Survey. However, Core Inflation is expected to rise to a new multi-decade high at 4.0% from 3.8% in May. The bar is high for today’s inflation data to alter this narrative and will require more evidence of rising inflationary pressures in “stickier” components (like housing costs). That implies the bond market reaction is likely to be muted (i.e. a spike higher in yields to reflect inflation fears seems unlikely). Subdued yields ought to keep US equities supported, particularly tech/growth names.

US inflation data comes ahead of US Retail Sales data later in the week, that is expected to continue to show the fading boost as a result of the Q1 stimulus cheques, and ahead of FOMC Chairman Jerome Powell’s testimony before the Senate Finance and Banking Committees on Wednesday and Thursday. Powell will most likely “stick to the script” and not deviate much from the comments he made at last month’s post-FOMC meeting press conference, as fellow key FOMC member John Williams did earlier in the week. That means he will likely reiterate the conditions for substantial progress to the banks goals having been fulfilled have not yet been met, meaning it remains too early to taper the bank’s QE programme, though the discussion as to when this might occur has begun. This message will likely provide reassurance to equity investors and keep stocks supported (or at least a buy on dips). For the same reason, some FX strategists expect this stance might weigh on the US dollar. Markets did not pay much attention to comments from FOMC Member Bullard, who more hawkishly called for tapering of the bank’s bond buying to begin from now. He does not wield much influence at the bank.

Turning to other asset classes, the sleepy tone is evident elsewhere also; crude oil prices are not much changed on the session with WTI consolidating just above $74.00 and Brent just above $75.00. Both have recovered about half of the losses sustained last week amid heightened OPEC+ disunity and Covid-19 delta variant concerns. Both of these themes are likely to continue to weigh on crude oil prices over the coming weeks, given that there is no indication yet that the policy disagreement between the Saudis/Russians and the UAE is close to being mended and that the delta variant continues to accelerate in Europe (where some countries are now tightening restrictions) and Asia. However, most analysts continue to expect global oil markets to remain undersupplied for the remainder of the year to the tune of well over 1M barrels per day, which should see global oil reserves continue to be eaten into. This should keep a floor under prices, many analysts suspect. Turning to gold; the precious metal continues to consolidate within recent ranges that have seen the precious metal barely move more than about $15 either side of the $1800 level over the past six sessions. Gold traders will be keeping their eyes on how bod markets and the US dollar react to the incoming US risk events detailed above.

Speaking of the US dollar; the buck is a tad firmer on the session as traders await US CPI, with DXY this morning pushing back towards the 92.40s, meaning it is roughly in the middle of this month’s 92.00 to 92.80 range. There appears to be some buying interest ahead of the 21DMA, which currently sits just to the north of the 92.00 handle. Looking elsewhere in FX markets this morning, while the buck is amongst the best performing G10 currencies this morning, JPY takes the top spot, up about 0.1% on the day. AUD and NZD, meanwhile, are both roughly flat, with the former shrugging off a weakening in Business Sentiment in the month of June according to an overnight NAB survey and further lockdown concerns (which are now seeing analysts revise down their Q3 growth expectations for Australia). Stronger than expected Chinese trade data for the month of June seems to be helping the two antipodean currencies given the latter’s importance as an export destination for both Australia and New Zealand. EUR, CHF, GBP, CAD and NOK are all underperforming and down about 0.2% on the session versus the buck, with no clear fundamental drivers of the move. USD flows are likely to be the main driver of these currencies today, with pandemic updates having taken a back seat for now (more restrictions being imposed in mainland Europe but the UK going ahead with reopening despite a rising infection rate).

The Day Ahead

As noted, US CPI at 1330BST is the key event today. Aside from that, FOMC member Bostic (usually more hawkish) is speaking at 1700BST and then again at 1930BST and is worth watching. Meanwhile, there is a 30-year US bond auction at 1800BST and the release of weekly Private API crude oil inventory data at 2130BST, which is expected to show an eighth consecutive decline in US crude oil inventories (as demand continues to outstrip supply).