The USD/JPY trades within a breath of 147.00 after hot PPI data and hawkish Fed minutes. Today’s CPI data is expected to show that core CPI continued to rise in September.
· Gilt yields are under the spotlight, with BoE bond buying support due to end on Friday
· US stocks fell for a sixth straight session dropping to a 2-year low on hawkish Fed bets
· US core CPI is expected to rise to 6.5% YoY, up from 6.3%
The FTSE ended yesterday at an 18-month low, with banks and housebuilders leading the charge lower. Turmoil in the bond market continued, with long-term yields rising to the levels where the BoE announced its intervention last week. Concerns over the mini-budget and UK government funding plans have resulted in a steep selloff in UK bonds and stocks. The BoE is set to end its bond-buying support on Friday.
Pensions have been selling assets rapidly to cover margin calls on vulnerable derivatives if interest rates change significantly ahead of the Friday deadline. This is being felt across the global financial markets, with corporate bonds in the US and Australia also being dumped. The dumping of these assets started after the mini-budget and could accelerate should the BoE pull support as planned on Friday.
The pound bucked the trend, jumping sharply higher after the BoE Chief economist Huw Pill hinted at a large interest rate rise by the central bank in November. GBP/USD rallied 1.3% yesterday, climbing briefly over 1.11.
US stocks
Stocks on Wall Street also came under pressure following hotter-than-expected PPI data and the minutes of the September FOMC meeting. There were few surprises in the minutes, which are from the meeting where the Fed hiked rates by 75 basis points, supporting the Fed’s hawkish stance. Policymakers again highlighted that the cost of doing too little to tame inflation outweighed the cost of doing too much.
USD/JPY
Central bank diversion helped push USD/JPY to a new 24-year high, within a breath of 147.00, well above the level of 145.90, where the Japanese Ministry of Finance intervened in September to shore up the yen. Japanese authorities have said that they are watching the FX rate closely.
US CPI
Today’s US CPI data is under the spotlight and isn’t expected to alter the Federal Reserve’s path toward a 75 basis point rate in the November meeting. The headline inflation number is expected to increase to 8.1% YoY in September, down from 8.3% in August to 8.5% in July. However, core inflation which strips out more volatile items such as food and fuel is expected to rise to 6.5% YoY, up from 6.3% and 6.1% previously.
The trend of rising core inflation is a concern and suggests that inflation is becoming more embedded within the US economy. This warrants a more aggressive approach from the Federal Reserve to tame inflation but also supports the Fed in keeping interest rates higher for longer.
It would take a significant miss on headline and core inflation to raise the probability of the Fed easing off the hiking pedal. Meanwhile, hotter-than-forecast inflation could lift the USD and add further pressure to US stocks, which trade at a two-year low.
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