Inflation

The big question for the day ahead of the US CPI report is whether we’ve reached “peak inflation.” In essence, it’s easy to argue that we’ll see lower inflation readings in the coming months, and that may be all that markets care about – at least for the time being. There are no easy solutions to the world’s problems when it comes to resolving the issues that have caused inflation pressures to skyrocket in the last year. And those problems aren’t going away anytime soon.

• While it is reasonable to expect less hot inflation numbers in the future, this does not imply that inflationary pressures will be significantly reduced.
• While it is easy to raise interest rates when inflation is high and argue that it will eventually fall back to 2%, it is not so easy when that someday keeps getting pushed back. At some point, policymakers may need to acknowledge that inflationary pressures will become more persistent and sticky, and that if they are to combat this further, tighter policy may be required for a longer period of time. In the case of the Fed, this could imply guiding the Fed funds rate to a higher terminal rate than anticipated.

USD/JPY

USD/JPY falls back below 130.00, with the US CPI report in focus.

The dollar fell on the day.

The pair has been in a “will it, will it not?” situation when it comes to breaking the 130.00 handle since the end of April trading.

And trading this week is no different, as the Monday rally failed to hold, with the pair falling back below the 28 April daily resistance at 131.25. This coincided with a drop in Treasury yields, with 10-year yields falling from 3.20 percent to 2.93 percent currently.

Bond

Treasury yields fall for the third day in a row

2-year yields -3.3 basis points to 2.590 percent

5-year yields -5.8 basis points to 2.860 percent

10-year yields -5.9 basis points to 2.934 percent 30-year yields fell 5.2 basis points to 3.078 percent.

There are no simple explanations for the sudden shift in bond market sentiment, but it is worth noting because it has a lot to do with the dollar and equity sentiment in recent weeks.

The relief we are witnessing is palpable. As bond selling subsides, stocks are beginning to rise, while the dollar is also showing signs of weakness today.

Inflation metrics will be crucial in the coming months. If they point to signs that we’ve reached a “peak” or are plateauing, it may be enough to cause a more push-pull mood in markets. And as a trader, that will be difficult to navigate.

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