Sticky core inflation makes it hard for the headline CPI to disappear + the Bank of Canada rattled the reversion party + oil struggles


US stocks were weaker on Wednesday, S&P down 0.4%. US 10-year yields fell 4 basis points to 2.93%, 2-year up 10 basis points to 3.15% after a beat in the US CPI and the BoC rose 100 basis points. base. At -22bps, the 2s10 is the most reversed since November 2000, and the market moved to a price of around 90bps ahead of July’s FOMC meeting. The EURUSD briefly fell through parity against the USD, although it was back to 1.0040-50 in recent trades.

The fundamentals show that inflation is still sticky across most stories, making it harder than expected to shake off the shock of the big headlines in good size and price at the top; therefore, most people do not risk adding more content to trade around current hedges and the short side of the ledger.

As rates veered into moonshot mode, pricing some risk premia for a 100 basis point hike in July, most risk assets initially took it on the chin as the market added to the sharp shock and short on rates.

Still, stocks have bounced off CPI lows as the market thinks the Fed will rise faster and cut sooner, with the first cut now set for March 2023 from May.

But the Bank of Canada rattled the reversion party by opting for a surprise 100bp rate hike because inflationary pressures spread more widely through the economy, according to BoC Governor Tiff Macklem.

At the news conference following the decision, Macklem said early rate hikes would avoid higher interest rates down the road.

Indeed, that is precisely the impetus that US Treasuries are trading against the US and Federal Reserve next Wednesday: anticipated increases given the high CPI, which means more cuts down the road.


Crude prices are stabilizing today after Tuesday’s aggressive sell-off, although Brent attempted to rally against the dollar in the New York session and failed. President Biden is starting negotiations with OPEC on increasing supply, and it looks like the market is waiting to see what comes out of those meetings.

Yet, as the broader market worries again about a possible Fed overshoot and Europe is mired in stagflation fears, oil is struggling to break free from its current recessionary malaise as traders remain in de-risking mode due to a slightly weaker demand outlook this year on China’s slowdown. covid recovery, dollar much stronger than expected. But more importantly, it all hinges on the change in sentiment as many levels of recessionary scenarios are factored in and a risk attitude takes hold. Here, I insist on the “feeling”, not on the fundamentals.


As the dust settles after printing the highest US CPI in 40 years, EURUSD is still trading above parity and USD bulls must be disappointed with the lack of follow through and the fact that the pair failed to hold below 1.0 for 1.0 Encore, until Nordstream 1 retraces EURUSD and G-10 beta currencies may remain on the defensive as the market is worried about stagflation. And I would point out that the points of tension go beyond the shortage of German natural gas to the wider European energy market, which is currently going through a deep crisis.

But with the market signaling Fed rate cuts, this paints a messy FX picture where the USD should still be outperforming but perhaps less, knowing that the Fed pivot is likely to see a more asymmetric reaction from the dollar facing weakness.


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