New York open: Pre CPI housekeeping setting in?

Given the absence of macro catalysts during the previous sessions, markets are shifting into CPI trance mode, where participants will tend to reverse the dominant trend direction as pre-high-risk event profit-taking sets.

After yesterday's weak close on US equities, risk assets now only partially reflect the good news on US inflation and global growth, as most traders spent the last 18 hours fretting about the Fed’s emphasis on not loosening FCI conditions too much. Still, as Covid cases drop in China, there will be much room to adjust for global markets with an upside bias in China-exposed stocks, CNH, commodity currencies and industrial metals.

The critical question for the 2023 policy outlook is when can we expect the peak FED policy impulse? 

The dual forces of a partial moderation in wages and the energy price impact on headline inflation have raised the odds that the Fed will get to 5-5.25% and a complete stop, and that should be good news as we are near the end of the rate hike cycle. Depending on how the data unfolds, the Fed may stretch the process through a lengthier string of 25s, or we could also see a pause/re-start scenario unfold.

Either way, it is difficult to envision the Fed cutting rates in 2023, with inflation unlikely to return to trend this year. The 50bp of cuts priced by the end of 2023 looks wrong. If central banks stay hawkish, it will be for good growth rather than inadequate supply reasons. These changes are significant from a risk perspective, and the US dollar's universal appeal as the go-to safe- haven should drop significantly.  

And the fall in energy prices is a significant tailwind for the soft-landing camp. At the surface level, the energy price moves mean we should expect a significant reversal of the intense upward pressure on headline inflation, which should bear out in tomorrow's CPI data.