Upcoming US Inflation Figures to Set the Tone

Bond yields, while still elevated, have come down from the 16-year peaks reached last week. Partly this is due to investors buying bonds again as a safe-haven play (which has pushed yields lower), and partly this is due to dovish comments seen from Fed officials in recent days, which has reduced expectations for a November rate hike from the FOMC. The 10-year yield was last seen at 4.64%, compared to the 4.88% high from last week.  

However, while treasury yields have eased, there is still some potential volatility ahead this week for equity, fixed income, FX, and commodity markets with some key US inflation data due for release. PPI (Wednesday US time) and CPI (Thursday US time) data releases could again sway market expectations for what the FOMC may do on the interest rate front between now and year-end. While there are hopes we will see further moderation on inflation levels, this is far from certain, and any upside surprise in this week’s inflation gauges could see yields marching higher again.  

Oil was on the backfoot last week with the price plunging on interest rate and demand concerns, though the Middle East conflict has put some upward momentum back into the price for the WTI and Brent contracts this week. There are still some unknowns with regards to just how widespread or otherwise the Israel-Palestine conflict could develop into. If there is further escalation and involvement from other nations, this brings supply disruptions into the scenario which could have oil trading back above US$90 per barrel again. It remains to be seen what if any supply disruptions unfold but for the time being, the risk appears to be slanted to the upside for the oil market given the latest flare-up in the Middle East.  

In currencies, the USD has come off the boil in tandem with bond yields, with the DXY (Dollar Index) now trading on the 105 handle rather than the 107-handle hit last week. Dovish comments by Fed officials have dulled the greenback’s momentum, while renewed talk of Chinese stimulus hopes have assisted risk-assets. Meanwhile, the yen has found some support this week which has kept the USDJPY rate under the closely watched 150 level. If we happen to see any upside surprises in the US inflation figures this week, the 150 level on USDJPY could be in play, which could test the nerve of monetary authorities in Japan who seem ready to intervene in defence of the yen.  

Also, ahead this week are some much anticipated inflation numbers from China on Friday. Investors will be watching closely to see if there are any further signs that the Chinese economic downturn may have bottomed out. If CPI comes in above the 0.1% number registered last time around, this could indicate that deflationary pressures have eased, and some consumer confidence may be returning. Overall, inflation data from the US and China as well as the path of bond yields looks likely to set the tone for risk sentiment for the remainder of the week.  

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