US CPI to set the tone for price action

The markets get a Valentine treat this afternoon when we get the release of the US inflation figures for January.

This remains arguably the most important data point on the calendar with both policymakers and traders fixated on elevated price pressures.

Although the downtrend from the June peak of 9.1% is expected to continue, the pace of the decline may stall and bolster thoughts of higher prices for longer.

This kind of “sticky”, resilient inflation will hit stocks and propel the greenback higher.

The consensus forecast for the annual headline print of 6.2% would be the slowest gauge of inflation since October 2021. But it would represent the smallest drop from the prior month since September, owing to higher petrol prices.

Core inflation is also seen falling to 5.5% y/y in January from 5.7% previously, though stronger used car prices and rents are forecast.

These two heavyweight components are key to prices dropping strongly through this year.

 

Markets pricing in no rate cuts

Money market moves over the last few weeks point to bets that inflation will not come down as fast as previously thought.

These trades have increased especially after the bumper US jobs data with the unreal headline print of 517,000. The terminal rate in Fed funds is now seen peaking around 5.2 in July, up from less than 5% a month ago.

Perhaps more importantly, the December futures contract for the Fed funds rate has never been higher since the start of the contract. This is now at 55 which indicates no rate cuts this year.

Of course, much will depend on today’s report.

Data close to estimates would probably be seen as confirming the cooling trend in price pressures.

This should see falls in the dollar and stocks, especially high growth tech, advance.

But these gains could fade if investors believe the “disinflationary” process, which Fed Chair Powell has talked about recently, is seen as faltering with resilient prices ahead.

 

FTSE 100 powers ahead to 8,000

The UK saw wage growth accelerate more than expected this morning. Growth in average regular pay, excluding bonuses rose to 6.7%, beating the forecast 6.5%.

This was the strongest growth rate outside of the pandemic period.

The important CPI data for the UK gets released tomorrow morning.

A strong report will bolster bets on another surprise 25bp rate hike, after the BoE hinted at pausing its tightening cycle at its last meeting.

But the FTSE 100 index is ignoring the state of the domestic economy and is set to open at a record high.

The index is stacked with multi-national companies who book the bulk of their revenues overseas.

They are also not encumbered by the potential recession in the UK.

 

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