Ending A Mixed Week, As Markets Believe Inflation Is Falling Despite Higher CPI

This week has been difficult to trade as most assets kept making reversals, which shows undecisive markets, despite a higher CPI reading for December. The commodity currencies tried to turn bullish a few times but gave up all of their gains by Friday evening and ended up flat for the week.

US stock markets on the other hand closed another bullish week, ending at all-time highs. The US dollar ended the week little changed, however, it should have been impacted more by the 10 basis point decrease in 10-year Treasury yields, but the broader market is struggling to understand what’s going on in bonds, which is concerning.

The US CPI (Consumer Price Index) came in above expectations on Thursday, which gave the USD a little push higher, but it couldn’t sustain the gains and gave them back in a few hours. Yesterday, the US PPI (Producer Price Index) report for December was released, showing an increase of 0.2%, however, expectations were for a higher reading.

US December Producer Price Index Report

• US December PPI YoY 1.0% vs 1.3% expected
• November PPI YoY was +0.9% (revised to +0.8%)
• PPI MoM -0.1% vs +0.1% expected

Core Producer Price Index

• PPI ex-food and energy YoY 1.8% versus 1.9% expected. Prior month 2.0%
• PPI ex-food and energy MoM 0.0% versus +0.2% expected. Prior month 0.0%
• PPI Ex food and energy/trade 2.5% versus 2.5% last month (revised from 2.4%)
• PPI Ex food and energy/trade 0.2% versus 0.1% last month

The US dollar turned lower on Friday as a result of these figures, and bids returned to the front end of the bond market. This reinforces some traders’ assumption that lower the market is convinced that inflation is just a matter of time. Next week we have the PCE price index report which is the FED’s favourite, but there is also a long weekend ahead in the United States to cope with, as well as some geopolitical risks on the horizon.

AUD/US Live Chart

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