The CPI number was released today, and a lot of emotional capital was invested in the possible aftermath. As it turned out, that was all wasted energy. The CPI number shows inflation tracking around 2.1% with core still hanging below the Fed’s target of 2%. Core inflation came in annualised at about 1.8%. The downer for the day was the release of retail sales. The December number was revised down whilst the January number was down from the previous month by 0.3%. The big mover in inflation was women’s clothing, up a whopping 3.4%.
So, for the traders, it was all a bit humdrum. Equity rallied because, well, why not and the Fed won’t be tightening unexpectedly or more than expected at least not on today’s numbers. However, we may have to prepare for a shock later in the year. For Powell, the newly appointed Chairman, the challenges are only just beginning. U.S. treasuries sold, and the yield curve flattened a tad between 10/30’s.
The market probably would have sold a bit more and equities may have been a bit bearish if the retail sales number was stronger than reported. The juggling act now commences.
For buyers of tips, widening inflation expectations will have a profound effect. For investors in the longer maturities, increased issuance and a widening deficit will figure strongly in any investment decisions. At this stage, the markets appear delicately poised.
In Germany, the 10-year bund broke out to 0.774% – the highest level since September 2015. However, for many Euro investors the sunbelt was where the buying action was. Portugal’s bond auction saw 10-years trading at 1.911% and the economy is growing at its fastest pace for 17 years.
Investors for the moment can breathe easily. However, they will be looking to GDP numbers to gauge whether the deficit will be increasing and how the economy is faring. A hiccup there could see a nasty bond sell off and that would impact equities. For the moment, an uneasy truce holds. Bonds are weaker, and equity is a little stronger. How long the nexus holds will be dependent on inflation and GDP numbers. For the moment the expectation is that the economy is robust, wages are increasing ever so slightly, and the CPI is a little higher. For the moment, all looks good. How long will this last?
Equities: The S&P 500 rose 1.5% before closing at 1.34%. The Dow rose 1.03%. The Stoxx rose 1.1%.
Currencies: The Bloomberg Dollar Spot Index fell 0.7%. The euro climbed 0.7%
Bonds: The ten-year sold off to close 2.92%. The 2-year closed at 2.18%. The ten-year bund closed at 0.758% and the UK gilt closed at 1.637% and the OAT closed at 0.997%. The U.S. curve closed 2/10 at 74.1bp, 2/30 at 100.3 bp and the 10/30, closed at 26 bp. The U.S. 5-year closed at 2.647.
Commodities: Gold rose 1.9% and WTI rose 2.7 %.
Bitcoin is trading around $9,244.7.
Aussie Market Today.
Equities should continue their rally and in quiet trading forge ahead.
Aussie bonds are and have been sold overnight as U.S. bonds sold off following the release of the CPI. Bonds are likely to remain weak on the day however as the weakness continues they may present good entry levels to buy.
The AUD is currently showing some strength against a weaker U.S. dollar.