Whispers of a softer CPI print

Despite most investors maintaining a cautious stance ahead of what is bound to be an action-packed Wednesday with the release of fresh US inflation data, US stocks nudged higher in subdued trading. There's a palpable sense of nervousness among investors as they exercise a modicum of restraint, concerned about the possibility of hotter-than-expected inflation figures. Such data could spark intense speculation, potentially shifting market expectations towards a scenario where the Federal Reserve refrains from implementing rate cuts in 2024. At the very least, it might dampen expectations regarding the magnitude of future rate cuts this year.

On the flip side, cross-asset macro traders, who consider a range of assets and their correlations in their stock-picking strategies, seem to view the rate cut odds a bit more favourably, akin to a “rate cut” light at the end of the tunnel. This sentiment is reinforced by easing oil prices amidst renewed hopes for progress in Israeli-conflict ceasefire talks in Cairo. However, despite widely held expectations that the US dollar should be trading higher due to reduced Fed rate cut expectations, major dealing desks exhibit reluctance to buy into the currency. Correspondingly, 10-year yields dropped large overnight from the highest levels this year as traders do not want to get too bearishly positioned ahead of CPI for fear of a massive squeeze on a cooler print.

Despite experiencing the most significant one-day decline in Treasury yields in over a month and a significant drop in oil prices, risk markets only bounced slightly, suggesting buyer fatigue may be setting in; let’s hope it doesn’t turn into buyer's remorse post-inflation print.

Subdued dollar buying and a slightly improved risk sentiment can be attributed partly to softer whispers circulating ahead of Wednesday's crucial inflation release. After two consecutive upside surprises, traders holding long dollar positions are concerned about a potentially weaker CPI print. Such an outcome could reignite expectations of a rate cut in June.

However, this reluctance to buy the dollar likely stems from factors beyond just positioning ahead of the CPI release. Indeed, the ambiguity between the household and establishment payrolls survey has left analytical traders in a bit of a stir. A growing faction in the investment world has turned skeptical about the strength of the Non-Farm Payrolls (NFP) data released on Friday.

Hence, I suspect this is why the US Consumer Price Index (CPI) is being billed as the big event, as the magnitude of cross-currents is too ambiguous this month. However, with Chair Powell and most colleagues looking for any excuse to cut interest rates, the first negative Non-Farm Payrolls (NFP) print almost surely triggers a rate cut at the very next Federal Open Market Committee (FOMC) meeting.

In Asia, the spotlight is on wholesale inflation figures from Japan, which could serve as the catalyst for testing the 152.00 level for dollar/yen, where the Ministry of Finance is thought to be lurking. Still, intervention ahead of the all-consuming US CPI print is an unlikely proposition, with 153 more odds on if hotter US price data comes to fruition.