But why?

Looking at the market pricing, you could’ve hardly guessed, but yesterday’s US inflation report was not brilliant.

On a monthly basis, the headline inflation ticked higher from 0.1% to 0.5% as expected.

But on a yearly basis, both headline and core inflation didn’t ease as much as expected. Core inflation fell from 5.7% to 5.6%, instead of the 5.5% expected by analysts, while headline inflation eased from 6.5% to 6.4%, versus 6.2% expected by analysts.

And if we take it to the decimal point, that easing was even less. In fact, US headline inflation barely eased from 6.45% to 6.41%.

On the contrary, over the past three months, core inflation for example rose from 4.3% to 4.6%. And valentines had to spend 17% more on a romantic dinner this year!

So, nothing in that inflation report was ok.

And hotter inflation is not the elephant in the room. It is very much in line with the abnormally tight US jobs market.

This suggests that the rate hikes from the Federal Reserve (Fed) don’t translate into a weaker jobs market just yet and inflation, which has been encouragingly trending lower since summer gives signs that we may be soon coming to a point where it will be harder to make progress.

Services and shelter are the areas that should show improvement, and for now, it doesn’t look promising.

Why equities rallied?

You certainly expected to see a bearish market reaction to a strong US CPI data, right?

Well, the reaction was… mixed. The US stocks opened the day higher, then the S&P500 fell, which was the normal reaction, but then it rebounded to close the session near flat.

Nasdaq also gapped higher at the open, sold off, but rebounded to close the session 0.70% higher.

It’s perhaps because there were so many red flags about the possibility that inflation ticked higher that investors were happy that the data wasn’t so bad after all.

And/or, optimism in the market is so strong that neither the Fed, nor the data couldn’t do anything to hammer it.

Either way, a few more Fed members made hawkish comments after the data, but all investors heard was ‘bla bla bla’.

Sometimes it takes markets some time to come back to their senses.

But it’s worth noting that the downside risks prevail, though there is no reason for the equity rally to stall. If a disappointing inflation print couldn’t reverse the rally, I don’t see what can.

This morning, US futures are in the negative.

FX and yields at the wake of the US CPI 

Still, treasury markets seemed more down to earth, as the US 2-year yield ticked to the highest levels since last November, activity on Fed funds futures gave a little more than 12% probability for a 50bp hike at the next FOMC meeting, versus around 9% at the start of the week.

But the dollar index remained stuck below its 50-DMA.

Gold extended gains to $1843 on the back of stronger yields and firmer US dollar.

The EURUSD found support above the 50-DMA, which stands around the 1.0715 mark.

The dollar-yen cleared resistance near its own 50-DMA level, and is now testing the 133 offers, the minor 23.6% Fibonacci retracement, to the upside. I don’t see a particular reason for the dollar to soften given the latest inflation figures, but there is always a risk that the new BoJ governor Ueda says something like ‘we will scrap the YCC policy because it makes no sense’ and boom, the pair could go below 130 before you even know. So the risks are still tilted to the downside in USDJPY.

in the UK, inflation in January still eased more than expected to 10.1%. That’s not the sharp easing that Mr. Bailey was talking about, and with a 6.7% wages growth on average, we may never see inflation in Britain crash, but both headline and core inflation in Britain eased in January. Sterling took a dive post data.

Crude oil remains offered into the 100-DMA, near $81pb level, and the bears are in charge of the market this morning as the latest API data showed a massive 10 mio barrel build in US oil inventories last week, while Biden Administration announced there would be further releases from the strategic petroleum reserves of 26 million barrels earlier this week.

The more official EIA data is due today, and will show a similar surprise. So, US crude is certainly on its way to test the 50-DMA to the downside, near $77pb.