Australian dollar rebounds on inflation sell the fact

See the latest Australian dollar analysis here:

Macro Afternoon

DXY eased Friday night despite tearaway US inflation:

The Australian dollar was firm:

Oil and gold firmed:

Base metals were soft:

And big miners:

EM stocks faded:

Nut junk rallied:

The Treasury curve steepened:

And stock lifted led by GAMMA:

US inflation was very strong but it is going to fade ahead. BofA:

Consumer inflation stayed hot in November as core CPI rose a robust0.53% mom, which boosted the yoy rate to 4.93% from 4.56% yoy—the highest since 1991. Headline CPIjumped 0.78% mom as energy prices spiked 3.5% mom and food rose 0.7% mom. Headline % yoy similarly soared to 6.81% yoy from 6.22%,—the highest since 1982.

In core goods, new cars picked up1.1%mom and used cars surged 2.5% mom as the auto sector remains constrained. The move in used cars was actually lower than expected given that wholesale prices moved up 5.3% mom in September, but this move may have been spread out given that CPI used cars surprised to the upside in the last report, also rising 2.5% mom like in this report. Wholesale prices suggest further significant upside in used cars in the months ahead as the gauge is up 14.5% through November relative to the prior high in May. Outside of autos, core goods components broadly gained as apparel popped 1.3%, household furnishings/supplies rose 0.7% mom, and both recreation and other goods rose 0.3%mom. One exception was education/communication commodities which slipped 1% mom. The breadth of gains in goods likely reflects ongoing constraints in the supply chain as well as the pull forward in the holiday shopping season, which meant earlier discounting in October.

In core services, OER and rent of primary residence stayed hot, growing 0.4%+ mom for the third consecutive month. Travel components also surged as lodging popped 2.9%mom and airline fares soared 4.7% mom. Broader transportation services rose 0.7%mom as car/truck rental also jumped 1.1%, though MV insurance fell-0.8% mom. Outside of that, services components were mixed. Recreation fell-0.5% mom, education/communication and water/sewer/trash were both flat, other personal services inched up 0.1% mom, and household operations popped 1.1%mom. Medical care services grew 0.3% mom but this was below expectations as hospitalsfell-0.3% mom.

Overall, the continued strength in OER/rents indicates that persistent inflation pressures continue to heat up, although the mixed services components suggests we may not need to hit the panic button just yet. The breadth of gains across core goods supports ongoing pandemic-related pressures and the pull forward in the holiday shopping season. Travel components also rebounded as people went home for Thanksgiving, but we could see some softening in the near term given the rise of Omicron. The market response to this morning’s print reflects some disappointment on a headline level but affirmed expectations for the Fed to lean more hawkish. Inflation breakevens declined across the curve, but were concentrated in the front-end, suggesting that market may have been expecting a higher print than what was reflected in surveys. Expectations going in were probably bolstered after Biden’s comments yesterday that today’s print won’t reflect recent energy price declines. Real rates rose by 8 and 6 bps at the 3y and 5y point respectively. Strong persistent inflation pressures reflected in the reading support a continued Fed hawkish pivot and should continue to put flattening pressure on the nominal curve.

I remain bullish DXY. Markets have lifted positioning but there is more scope to fill:

With Europe and China struggling plus the latter clearly now working to sink CNY, King Dollar is still the only game in town.

Houses and Holes
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  1. It has been a long time since the 80s, so most people have either forgotten or have never experienced how inflation expectations works. Rather than the actual number, it is the expectation that fuels it into a self fulfilling prophecy.

    Like everything in the US right now, even inflation figures have become politicalized : one side tries to make it as big as possible, while the other side tries to brush it off as ‘supply side’ issues. The only way to decipher what is going on is to look at the US trade deficit, especially the one with China. It is s growing : so it is a surge in demand.

    What happened to the trade war Brandon?

      • It’s been a rubbish indicator for the past 30 years in the West, because all the inflation has been pushed somewhere else. In failed state like Zimbabwe and Venezuela, you can still see it in action.

        USA is not at that point yet, but it will get there if oil goes over $100 USD a barrel.

        • Fully agree.

          That said some wage inflation above the Real Inflation Rate is so due for Australian workers. So as long as there’s good wages growth in real terms I’m not phased about inflation.

          Deflation is much more of a concern.

          I don’t think we are anywhere near Stagflation either.

    • We will soon see………if the usual linkages hold up the worst could be over

      China is starting its own stealth sanctions regime in goods via international firms and Covid could give it plenty of cover

      Supply disruptions could just be starting and everyone is really going to need those medical supplies to hold up…….not to mention Ad Blue