Sell the Fact or Sell the Economy?

US December CPI was lighter than expected and that helped to stall the dollar rally. The Swiss franc was the top performer while the New Zealand dollar lagged. UK Dec CPI came in weaker than expected but cable manages to regain 1.30 as USD is sold across the board. Trump added some important reminders with regards to the conditions to the US-China trade deal. More on retail woes below.  US PPI and Empire manufacturing are due today, followed by the Fed's Beige. A new trade was issued yesterday, while the Premium Video (5 Trading Points) is posted below for subscribers.  There are currently 8 trades open in FX, indices, commodities and crypto.

On Tuesday, US CPI rose 2.3% in December compared to 2.4% expected and the same report showed flat year-over-year weekly earnings growth versus the +0.8% consensus. The dollar sagged after the release and that gave an opening for retracements in the euro and pound.

USD/JPY also stalled at 110. Further selling came on a report saying that the US hadn't agreed to reduce further tariffs in the phase one deal until at least after the election. That sparked some risk off sentiment but it shouldn't have been a surprise. The US already reduced the autumn tariffs when it announced the deal and there were no rumours or expectations of further cuts. Later, Mnuchin said they would review tariffs after a phase 2 deal was signed.

The main risk in the day ahead is a sell-the-fact on the deal signing. However it's almost too-obvious of a risk to materialize. Still, the runaway moves in momentum stocks have us wary.

If there is to be a reckoning it will come on the economic side. The big picture theme for early 2020 is monitoring how businesses investment responds to news of a phase one trade deal. While the deal will be signed on Wednesday, it was announced Dec 13 and that bump should begin to materialize soon. If so, early signs may show up in Wednesday's Beige Book report. It's due out at 1900 GMT and given all the good news that's been priced into markets in the past two months, it's imperative that some positive economic momentum begins to materialize early in 2020 and this release is a good place to start.

Back to Retail Concerns

There are also rumblings about a poor US retail sales report due Thursday, in light of shocking guidance by retailing giant Target. Ashraf mentioned to watch 2 things: the VVIX relative to the VIX, even as the latter remains below 13.0. And, the  flattening of the US yield curve as the yield spread between 10 and 2 year yields drops to 22.9.