US stocks advance amid optimism over the cooling inflation outlook as investors await confirmation bias in the latest inflation data, which could tilt the scales in favour of a .25 bp hike.

Admittedly, there is still some residual uncertainty on the 25bp vs. 50bp question because the FOMC minutes were inconclusive, so Thursday’s CPI release will be an essential input into the Fed decision.

But with disinflation well underway, even the slightest monetary tightening shocks are unlikely, given the essential aspect of last Friday’s US employment report was the muted 0.27% increase in average hourly earnings. Notwithstanding the significant downward revisions to prior months.

The Fed will likely step down to a 25bp hike pace in February, a decision partly predicated on the idea that monetary policy acts with lags. So, they could prefer to stay steady at this stage and watch the data unfold.


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But the bottom line is the twin forces of moderation in wages and energy price inputs have raised the odds that the Fed gets to 5-5.25 % and stops. But if markets get new confirmation of unequivocal cooling in core inflation, they will be quick to price in downside risk to the current dot plot outlook, favourable for risk and bad for the US dollar.

The fall in energy prices is a significant tailwind for the soft land camp. On the surface level, the energy price moves mean we should expect a reversal of the intense upward pressure on headline inflation witnessed last year. Brent is down almost 10% already YTD and 40% off the Mar-22 highs. The move in European gas, as implied by TTF price) is even more staggering, down over 50% since the start of December. Focusing on gas, the combination of warm and windy winter weather, Q4 demand curtail, and high LNG imports have helped conserve inventories leaving Northwest Europe in a much more comfortable storage position than expected.

On the micro front, 4Q22 earnings begin in earnest this Friday as investors will be interested to hear what Corporate America says about inflation, labour, and recession risks.

Looking across asset classes, the dollar is treading water, yields on 10-Year US Treasuries are higher, and oil is trading off overnight highs but well within the well-trodden territory as traders await better news on the China mobility front.

We expect market participants to shift into idling mode as the await the next macro and micro data round.


In a flick of a switch, China has completely dismantled all of the covid restrictions it had implemented over the past three years. Unfortunately, this has led to a surge in Covid cases, but recent surveys suggest that the first wave has already peaked.

The speed at which China is unwinding its Covid restrictions is astonishing and has caught the world by surprise, as the market then needed to move from sell-all to buy-all China in a drop of a hat. So, it has been an absolutely astonishing rally.

Although mobility has improved, given the loosening of cross-provincial border restrictions and ahead of the Lunar New Year, improvements are still well below pre-pandemic levels. And the consumption recovery remains weak; nevertheless, the market has discounted the near-term economic headwinds as hope springs eternal once the Winter Covid waves pass.

On the RMB, the repatriation of offshore US dollar holding is ongoing. And there is a much higher rate of FX conversions by exporters adding enthusiasm to the speculative buying binge. RMB’s weakness in this environment will be perceived as an opportunity to buy.

Overall, RMB appreciation should continue. However, I am wary of chasing significantly beyond 6.7, at least in the short term, as the authorities could start leaning into the move, particularly given the ongoing strength in the CFETS basket despite a weaker export backdrop.

Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT