MARKETS
According to closely watched data on Friday, producer prices in the US rose more than expected last month. And as investors recoiled in the face of a possibly more naughty than nice FOMC, an ominous feeling gripped markets ahead of this week's crucial CPI report and FOMC meeting.
While headline inflation continues to drop, the top-side beat on PPI expectations suggests that while inflation might be climbing down the mountain, the slope remains uncertain.
The S&P 500 continues its technical battle with the declining 200-day moving average. More fundamentally, valuations are rebooting alongside tighter Fed policy and higher interest rates. Still, the earnings outlook remains a crucial question mark, given that estimates have held up well in the face of a deteriorating economic sentiment.
Heading into the CPI print (Tuesday) and FOMC decision (Wednesday), implied vol for S&P 500 options expiring on those days has been nudging higher, setting up another vol event. As premiums dissipate on those days, it is best to buckle in for a very choppy mid-week, not to mention it is a good idea to factor in hair-trigger algos that will be in full swing on those days.
Bloomberg Finance LP, Deutsche Bank Asset Allocation
OIL
In a week that saw oil prices clipped hard, weakness persisted into weeks end. However, traders were generally able to look through a higher-than-expected PPI inflation print in no small part due to Putin threatening a G-7 Price Cap retaliation.
An expected bumpy China reopening coupled with the scenario of a mild recession in Europe and the US could lead to a harsher economic climate for oil markets. That dominant view is curbing bullish enthusiasm. After all, it was only a matter of time before the same slowdown that haunted stocks weighed on oil.
So, with oil prices caught in the downdraft from top-down macroeconomics and given the time of year, which sees traders in risk management mode rather than risk-taking mode, there will need to be a significant catalyst to bring oil bulls out of the pen or even to encourage bears at these levels. Hence the tetter-totter price action could extend.
Skepticism over China's gray area Covid reporting continues to raise suspicion and uncertainty, especially in oil markets, given the heightened sensitivity around mobility metrics. However, when traders are confident there is a favourable bend in China's Covid curve; oil prices will undoubtedly climb.
FOREX
There are plenty of tell-tale signs suggesting rates have moved too far, too fast, and a course correction is likely—either from the data or the FOMC this week.
While last month's inflation print was incredibly encouraging, service sector strength, where sticky inflation hangs out, will make it difficult for the Fed to achieve its inflation aim quickly.
Tuesday's CPI release and Wednesday's FOMC should reinforce that there is still a long way to go. So FX traders could position for sticky inflation and a hawkish FOMC delivery where the best expression would be long USDJPY given the pair's sensitivity to rising US yields.
On the flip side, if CPI inflation is benign and the Fed delivers a more easygoing tone, that would benefit the AUD most, especially in light of recent news on China reopening.
The Japanese Yen has strengthened by nearly 9% since the start of November, the second largest gain (after NZD) across G10 FX, driven by a significant decline in US real rates and what looks to be a significant unwind of long USDJPY speculative positions.
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