DXY is up and away as war gets underway in the Levant:
AUD crashed into the 62s and is back at the cliff’s edge:
CFTC shorts may have been cleaned out enough for another leg lower:
It ain’t CNY doing the damage:
Oil and gold went vertical:
Dirt, especially copper, is setting for a downside break:
Miners held on:
EM stocks are dead:
Junk is warning of wider stress to come:
Treasuries were bid:
But stocks fell anyway:
Societe General wraps the forces at work:
The main catalyst for the dollar to turn higher again, was US CPI data, which were fine on the surface, less so the more we dug. A 0.6% monthly increase in ‘super core’ CPI (core services exhousing) grabbed the most attention.The annual rate of inflation on this measure still slowed, to 3.9%, but on a 6m-annualised basis it has turned higher.
While goods inflation has normalised, services inflation hasn’t.
In the period between the financial crisis and Covid, goods price inflation averaged just under zero, and services inflation just under 3%. That delivered 2% CPI overall.
The goods sector has seen inflation melt away, but while US household balance sheets are still OK, and the labour market is tight, there isn’t anything to apply downward pressure on services inflation, yet.
Too much demand for services, relative to the available supply of service-delivering labour, will keep the debate about policy lags going, and keep some arguing for yet higher rates.
Either way, the dollar remains supported, by the economy, by the Fed and by the cascade of chaos.
The war is having an interesting impact on inflation expectations. It appears oil will be bid on any escalation. But so will bonds, meaning yields actually fall.
This might play out as increasing the likelihood of more rate hikes, lifting short-end yields and reversing the curve steepening.
In turn, DXY will rally higher on yields and a safe haven bid.
Even if the Fed does not chase oil, DXY will, and it could become the primary tool for further US tightening.
AUD is still going lower.
