Wednesday Focus The inflation Litmus Test

Totems matter

Rightly or wrongly, U.S. inflation data due this afternoon has come to be seen as a litmus test of whether or not economic conditions continue to support equity market advances. With few major stock indices extending their recent correction much beyond 10% from January highs, market participants are wary that any overshoot in price growth relative to expectations could upset still-fragile sentiment anew. The view is a little ‘totemic’, of course. Quite aside from the old truism around not over-emphasising one, or even a few data points, evidence linking long-term interest rates to inflation rates is notoriously sketchy, meaning markets should discount any short-term impact on rate expectations from inflation changes. Markets are not like that though. Any upside surprises against the 1.9% year-to-year print expected (down from December’s 2.1%), and more importantly 1.7% and 0.2% core annualised and monthly forecasts respectively, will trigger a quick re-think for risky assets. Potential March and May Fed rate rises have probabilities between 75%-77% according to fund futures and they’re now largely been priced into U.S. equities. So the focus is on whether projections of further tightening by the Fed in later months will be vindicated by economic readings in the run-up. Markets could certainly get themselves into lather on the notion that inflation greenlights the full clip of hikes the Fed has cued up. It’s notable that whilst the imperfect barometer of U.S. equity market anxiety, the VIX, has inevitably ebbed from spike highs notched when selling reached fever pitch, it remains within the notional ‘fear zone’ above 20. Even if markets take signs of brewing inflation in their stride, we would not interpret the mood as having completely dispelled crisis anxieties until the VIX crosses below that marker.

Broad rally

On that basis, indices were appropriately continuing to oscillate in wide arcs at the time of writing. At least the cross-Atlantic dislocation seen earlier in the week had righted itself, with both U.S. futures higher and Europe higher. The more positive side of elevated bond yields was also showing. It underpinned financial shares, including insurers. Also, Credit Suisse, whose third-straight annual loss was very much as expected (enabling the stock to rise with the market). Elsewhere, ThyssenKrupp’s outright operating profit acceleration aided broad sentiment on industrials. All this helped neutralise the effect of the Nikkei’s persistent non-participation in the global stock market bounce for a third session after the yen ground below 2017’s low.

Yen

The yen’s spike higher against the dollar kept it as the standout currency into the U.S. session. The pair marked a 15-month low of 106.84 and was last back up at 107.44 at the time of writing. But momentum gauges suggest the down leg is not complete, pointing to a short-term cap no higher than the 107.89 reversal high in Asia.

Euro

The euro is in focus for more technical reasons as it threatens $1.2356, a pivot established late last month and validated as resistance by an aggressive rejection earlier in February. The current up leg is in fact a recovery from that. The euro has tested slightly above the marker on Wednesday and post-consolidation probabilities suggest the rate will establish itself topside in the near term.

Pound

Sterling was above its own closely watched threshold of $1.3835. With anti-greenback momentum rallying here as well, completion of an AB/CD pattern that began in January off the aforementioned support would pitch cable back into the $1.40s in the weeks ahead.

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.