Equities wobble slightly in EU.
FX subdued.
Nikkei 1.04% Dax -0.12%.
UST 10Y 1.11.
Oil $53.
Gold $1854/oz.
BTCUSD $35000/oz.

Asia and the EU

EUR EU IP 2.5% vs 0.2%

North America Open

USD CPI 8:30

It’s been a subdued day in the markets with both FX and equities treading water in Asian and early European dealing but the tilt was towards risk off flows as the dollar gained marginally and equities drifted slightly lower.

There was little meaningful news flow in the day with just EU Industrial Production on the docket which beat significantly rising 2.5% versus 0.2% eyed. The EURUSD remained just below the 1.2200 figure while cable maintained its relentless bid rising to just whisker below the 1.3700 in late Asian session before selling off slightly. Markets continue to bet on quick vaccination and economic recovery in the UK even as current infection conditions remain dire.

In North America today the focus today may turn to the CPI readings due at 13:30 GMT. The data hasn’t mattered for years as US rates and inflation rates have remained muted, but this week’s jump in US 10 year yields through the key 1.00% barrier has traders on edge that markets are finally starting to price the possibility of inflation risk and that may spell trouble for stocks.

The CPI figures are expected to print at 0.4% vs. 0.2% on an unadjusted basis but still remain very low on a core basis with y/y numbers projected to show 1.3% vs. 1.2% gains – well below the Fed’s 2% target. However, given the discontinuities in the supply chain due to problems caused by the coronavirus the possibility of cost increases being passed on to the consumer level are quite real – especially as stimulus payments mitigate any deflationary pressures.

If the CPI data today surprises to the upside it can certainly cause problems for stocks as US yields rise further. The rally in stock has been predicated on ultra low rates which in turn allows for much bigger P/E multiples. While rates remain historically low, markets are always a relative rather than absolute game and even a 50 basis point rise off a 1% level represents a 50% increase in rates which could then cause massive speculative flows out of stocks – especially those with high multiples. After years of apathy, inflation data may suddenly start to matter.

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