Market movers today Focus today turns to inflation with US and Sweden releasing CPI. On the US CPI, we think there are two things to look out for. The first one is whether the monthly increases in CPI core remain high. The other is whether high price increases spread to more categories than e.g. cars, which would signal that inflation is broadening and could become morepersistent.US also releases NFIB small business optimism index, which contains an index on labour shortage and wage compensation plans that are worth keeping an eye on. They have both increased to very high levels over the past months. On Swedish CPI we are in line with the Riksbank's forecast but would highlight high uncertainty on the outcome
FX: ahead of the release today of US inflation figures, the euro hit a more than two week low at 1.1768 before recovering to close at 1.18, down 0.1%. The DXY dollar index ended unchanged at 92.6 after rising by 0.3% intraday. Save for the Norwegian krone and Swedish krone, G10 currencies weakened against the greenback. Emerging currencies also weakened against the US dollar, down 0.15% on average, in contrast to Latin American and EMEA currencies, which appreciated by 0.14% and 0.16% on average, respectively.
The Mexican peso set a 2-month high against the US dollar (USD/MXN at 19.91), bolstered in particular by the rise in crude oil prices. Commodities: aluminium prices broke through $3,000/t, at their highest level in 13 years. The price increase was mainly the result of two factors. First, concerns over the coup in Guinea, as the country accounts for 55% of China’s bauxite imports. Second, aluminium production curbs in China, with most recently those ordered in Yunnan starting in September in order to reduce energy consumption. Crude oil prices were up for the third consecutive session this morning.
Asia overnight Sentiment and markets are generally stable ahead of the US CPI data later today. While there are signs that the US Democrats are beginning to negotiate and perhaps even coalesce around a fiscal spending package, there is a long way to go on this front. Most Asian bourses and S&P 500 futures were trading higher at the time of writing. In G10 FX, the only significant mover was the AUD. RBA Governor Philip Lowe pushed strongly back against market pricing for rate hikes in 2022 and 2023, which weighed on the currency.
USD: the sum of all stagflation fears Ahead of the US August CPI data today, Crédit Agricole CIB economists are expecting the headline inflation print to come in at 5.4% YoY (vs consensus of 5.3%) while the core print is expected to come in at 4.2% YoY (in line with consensus). The release will be closely watched for any potential upside surprises that could be seen as exacerbating the Fed's dilemma at present. Indeed, the FOMC is trying to maintain its ultra-dovish policy stance to give the US slowing economy more time to recover while facing the biggest surge in inflation in modern history.
With the debate about QE taper raging on at the Fed, a stronger inflation print today could be seen as corroborating the views of the hawks at the FOMC and thus fuel market concerns about a more hawkish outcome of the 22 September policy meeting. In turn, this could boost the appeal of the high-yielding safe-haven USD. To the extent that the CPI data further puts the recent global risk rally to the test, any USD gains could be more pronounced vs risk-correlated G10 currencies.