It was billed as one of the most important pieces of market data points for years, but the US core CPI print has failed to live up to the hype, where hot numbers were expected to cause another leg down in risk appetite. The wash-up is a market overlooking both the retail sales and CPI report and undergoing a huge reversal and adding risk to the portfolio.
US core CPI printed 1.85% yoy or 0.35% mom in January, where this in itself was hotter than the 1.7%/0.22% estimates many had been expecting, and we find the 0.35% rise in core is actually the largest increase since March 2005. Some on the floors have talked about a “whisper” number going around of 0.3% mom, while some of have focused on the changes in methodology in calculating the numbers, which would have increased the volatility in the report. However, the bottom line is that core inflation did beat expectations. We also saw headline inflation rising 2.14%, beating the 1.9% consensus forecast, with energy prices offering a substantial boost here.
The inflation number may have come in above, the street, but let’s not forget the retail sales report came out on the shy side with a 0.3% (mom) fall in January (vs 0.2% eyed. While we saw the retail ‘control group’ element (a greater component of sales that feeds into the GDP calculation) effectively flat for the month (vs +0.4% eyed), and this will certainly see economist ratcheted down expectations for Q1 GDP. Let’s not forget a week or so ago the market got very excited about the Atlanta Fed having an estimate for Q1 GDP above 5% before it was revised down to 4% (on 9 February). Well, that real-time tracking estimate now sits at 3.2%, which seems far more rational.
Tracking this data we have seen some punchy moves in markets, but the combination of weak consumer figures and hotter inflation figures and yet we have seen strong reversals in so many markets and this is genuinely surprising. When the market wants to turn, it wants to turn and today’s session looks very interesting indeed.
On one hand we have seen good selling across the US Treasury curve, with the 10-year Treasury now sitting up at seven basis points on the day at 2.90% and this makes a lot of sense –  bond investors seem to be the most rational in the market today. However, we can also see that the USD, which initially spiked into 89.80 has given up all the gains and sits down at 88.78. We can see USD/JPY, which of course was one of the key focal points in Asia yesterday pushing into ¥107.57 on the CPI print, but this has reversed and is currently oscillating around the 107 figure. AUD/USD saw a decent push lower from $0.7855 into $0.7730, but now recedes above 79c, so a strong reversal here, and good Aussie employment data (at 11:30 aedt) could see the ‘battler’ pushing into the mid-79c level. We have also seen a strong reversal in EUR/USD, where price has reversed from a post-CPI low of $1.2280 to sit at $1.2436, while GBP/USD has pushed from $1.3800 to $1.4000. So some punchy moves in FX land, especially in emerging market currencies such as the ZAR and BRL.
(30 minute chart of AUD/USD)

The USD is firmly back in the doghouse again despite a steeper yield curve.
We can see a strong move in US equities too, where the S&P 500 was sold from 2671 to 2630 on the US CPI print, but the market has again reversed and sits up 1.0% at 2688, so a 2.2% reversal has to be respected and the relief can be seen in implied volatility, where the VIX index now resides below 20. The moves in tech have been even more pronounced and it’s a good news day, with broad-based moves in the various S&P 500 sub-sectors. The US yield curve is steeper and the 10-year is approaching 3%, but today it matters little and risk is added to portfolios, although the credit markets still need a little more convincing and we see the HYG ETF (high yield ETF) unchanged on the day. The moves in US equities have helped buoy Aussie SPI futures, which hit an overnight low of 5745 and now sit up at 5835, which in turn see our ASX 200 opening call currently at 5880, for a potential gain of 39 points or 0.7%. We should see a far more stable Japanese equity session today, with our opening call for the Nikkei 225 sitting at 21,330, where any follow-through buying could support the ASX 200 and help push the market into 5900.
Commodities have fired up, led by oil, which has caught a bid with the weekly Department of Energy inventory report showing a lower-than-forecast 1.841 million build in crude stocks. Gasoline stocks increased a sizeable 3.56 million, but if we look at price action in the crude tape, we can see the price has followed the broad reversal in semantics, with crude wearing a 60 handle again and putting on 2.1% and this should reverberate into the ASX 200 energy sector this morning. Gold has added $25 and sits at $1352 (at the time of writing), although base metals are fairly flat, while in the bulks iron ore futures are up 1%, with spot iron ore gaining 1.4%.
While Aussie jobs will be big event risk of the day, it remains an FX and rates play and shouldn’t affect the stock market to any great extent. Earnings might though, where we see names such as ASX, EVN, NCM, ORG, S32, SHL, SUN, TLS, TWE and VCX detail earnings numbers.
Originally published by Chris Weston, Chief Market Strategist, IG