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The Yen is in focus today as the BoJ reportedly investigates ultra-loose policy side effects. Inflation is today's other main focus - US numbers of course, but also Indian and Chinese CPI.
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Macro outlook
- Global Markets: Wednesday saw a return of cautious optimism in markets, with US stocks opening higher and then making further gains into the close. That resulted in a 1.28% gain for the S&P 500 and a 1.76% gain for the NASDAQ. Chinese stocks were a bit more circumspect. The CSI 300 was almost flat on the day (-0.19%) while the Hang Seng index rose just less than half a per cent. All of this took place on a day with little macro content to bite into. Bond markets were steadier after their recent gyrations, though we wouldn’t bet on the calm lasting. 2Y US Treasury yields retreated by 2.9bp, while the 10Y yield fell 8bp to 3.53%. EURUSD continued to ease upwards in this environment. It is now at 1.0766. Other G-10 currencies were also mainly a little stronger. The AUD is now at 0.6915, the JPY has opened sharply lower this morning at 131.78 on the news that the Bank of Japan (BoJ) will review the side effects of their ultra-loose policy. And Cable has pushed back to 1.2162. For the Asia FX group, Wednesday was a mostly positive day, led by the THB and IDR. There were small gains elsewhere, though the KRW slipped by 0.18% to 1245.99.
- G-7 Macro: December inflation data for the US will dominate markets later today. The consensus anticipates a small (-0.1pp) decline in the headline price level in December, which will reflect the further declines in retail gasoline prices over the month (amongst other things). That will take the headline inflation rate down from 7.1% to only 6.5%. Still high, but way off the peak of 9.1% back in June last year. Core rates are also expected to decline and should fall to 5.7% from 6.0%. If we get these outcomes or more, then we would anticipate risk assets rallying and the USD weakening. The bond reaction is less clear. The obvious move would be lower yields, but the interaction with equities could deliver something else.
- India: December inflation is released later tonight. Our own forecast is in line with that of the consensus, namely for inflation to remain at approximately 5.9%YoY, so just within the Reserve Bank’s inflation target range of 4%+/-2%, and below policy rates which are currently 6.25%. This outcome would stem from a more-than 0.2pp decline in the price level. But weakness in prices last year at this time will prevent this from lowering the inflation rate, at least for now.
- China: Inflation should continue to be mild in December given the high number of Covid cases after the sudden removal of most Covid measures. Similarly with PPI. Metal prices have increased in January so far, as the government is now allowing real estate developers to get funding from the market. Due to our expectation of a gradual pick up of activity after reopening, we don't expect there will be any inflation pressures in 1H23 for China.
Read next: Czech Republic: CPI inflation hits 15.8%, noticeably less-than-expected| FXMAG.COM
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What to look out for: US and China inflation reports later in the week
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Japan trade balance (12 January)
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Australia trade balance (12 January)
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China CPI inflation (12 January)
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India CPI inflation (12 January)
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US CPI inflation and initial jobless claims (12 January)
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Fed’s Harker gives a speech (12 January)
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South Korea export price index and BoK decision (13 January)
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US University of Michigan sentiment (13 January)
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Fed’s Bullard gives speech (13 January)
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China trade balance (14 January)
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Emerging Markets Asia Pacific Asia Markets Asia Economics
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