U.S. stocks traded notably higher Friday, with investors embracing a weak Services sector business sentiment survey, the first of this cycle, amid signs of descending wage inflation as crucial indications that the Fed will be able to ease its monetary tightening process, which may be optimal for equities

The U.S. jobs report had a little something for everyone: many more jobs but slower wage growth and a pullback in work hours, suggesting the economy is losing a bit of pep. But hold the applause; the hawkish Fed will likely anguish more about the ongoing tightness in labour markets. The nub of the Fed inflation problem ultimately boils down to cooling the labour market.

On jobs data alone, it was goldilocks with an asterisk. But the gloomy ISM Services data sent cross-asset sentiment soaring after the index fell sharply to 49.6 from 56.5 a month ago, and the ISM Manufacturing index slipped further to 48.4. With 2 of the 3 sides of the economy signalling ‘contraction,’ the growth outlook may take a significant hit and could cause the Fed to take notice

Both rates and commodity prices have dropped sharply over the past month-plus, suggesting that input cost inflation may soon fall; hence corporate margins and consumers may feel some relief in an unusual win-win scenario for both Main and Wall Street.


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And the last piece of the inflation puzzle looks set to fall into place. The inability to source components and materials worldwide has limited the availability of all sorts of things and contributed to the global inflation wave. Any signs that the supply chain is easing via a drop in Covid case counts in China should also be good news for the inflation outlook.

But with the recessionary storm clouds billowing on the horizon unless this week’s CPI print tells us inflation isn’t trending lower, I think we can pencil in 25 bp for the Fed in Feb, but still, no rate cuts through 2023 until the board declares “checkmate” on inflation.

With cross-asset traders mostly kicking tires all last week, they were forced to kick it into gear, playing catch up on Friday’s U.S. data dump as few were in position, and those who had goldilocks trades on board needed more to make it count. And this sets up for another wild ride this upcoming week into US CPI.


TOPIX started 2023 with a -0.8% wow decline, mirroring the trendless first week of U.S. trading this year. On a regional basis, however, Japan has well underperformed versus a solid start in Greater China on expectations of economic normalization in China during 2023.

For USD-denominated long-only investors, rapid yen depreciation had been the primary catalyst to remain underweight Japan during much of 2022. But JPY momentum has reversed due to several factors, mainly from BOJ’s decision to widen its YCC bands in December, which contributed to a -10% fall in USDJPY over the quarter. So that money could start flowing back into Japan with the JPY appreciating while Japan’s economy catches a blast from the past on China’s reopening tailwinds


China’s reopening has gone further- and opened faster than expected, the Bank of Japan has taken an incremental tightening step by widening its tolerated trading band for 10Y JGBs, and the winter solstice means that we may be through the most challenging part of Europe’s cold weather season, as evidenced by the collapse in natural gas prices.

Hence, the battle of the currency titans is warming up. With the improving activity picture in China and Europe, we should see demand for the EURO pick up and a possible extension higher if CPI does not hint at a Fed rate pushback.

The past two weeks have been crucial for Asia FX, with the China reopening complimented by a soft pivot from the BoJ. And there are bountiful impacts of China’s reopening on regional economies. We see Thailand as a massive beneficiary of the Chinese tourism bounce, which has been absent for three years, and we could see the USDTHB trade in the 32 handles sooner than later.

And if optimism around an eventual dovish turn from the Fed takes root from an encouraging US CPI print this week, you will likely see F.X. traders start to hit the dollar hard beyond the Asian borders next week.

Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT