If Monday’s cross-asset price action were any indication, it is shaping up to be a volatile week. For the first time this year, policy decisions from ECB and Fed are due in the same week, with both meetings preceded by the US CPI. All three events have been associated with heightened volatility this year.

US stocks are trading higher Monday as investors lean back into equities ahead of Tuesday’s November CPI reading. The downdraft we have seen in equities for over a week has given way, at least for now, to optimism around the debate about whether the Fed can engineer an economic soft landing.

At times, markets believe what they want to think, but in all fairness, any expected tweaks to the Fed dots or terminal rates will be perceived as tiny compared to the distance already travelled.

The data so far this month has painted a mixed picture, as the labour market remains tight. Some areas of the economy are surprisingly upbeat  — but the markets’ response has been pretty negative, with the S&P 500 trading down 3% in December.

Still, for Macro investors, the incremental seller most of the year, there is little incentive to jeopardize a strong performance by pressing shorts into yearend as the market narrative shifts from inflation, which is moderating,  to uncertainty around the growth outlook and a potential soft-landing.


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Still, the CPI reading later on Tuesday should be vital to setting the tone for Powell’s press conference since the current rate hike cycle is inflation-driven.

FX traders are very confident that the US dollar has now peaked, as has US inflation, with expect both to weaken further in 2023. Sure there is some risk that the upcoming US CPI and FOMC meetings could trigger a short US dollar squeeze. If anything, the risk would be in the CPI print as the Fed has already telegraphed a 50 bp downswing. So on a stronger inflation print, it would quickly raise the probability of a 50 bp hike in February and moderately shift the forward curve higher in the USD dollar favour. But it will not trigger a massive shift in US dollar sentiment as we are getting to the point where more aggressive rate hikes are not necessarily currency positive from an economic and growth perspective. Even more so with the market now focusing on growth vs inflation.

Given the on-the-ground reality that the official zero-COVID policy is quickly thawing, oil traders are looking for that definitive bullish catalyst to hang their hat on, and they may have found one.  With China planning to stop tracking some travel, policymakers are clearly shifting towards quarantine-free travel, boosting the economy and increasing oil demand.

Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT