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All eyes on US inflation

There’s a sense of every man for himself ahead of the US inflation data this evening, a data point that has left markets in limbo and seems to be taking an interminably long time to arrive. Equity markets continued taking risk off the board overnight, although US futures are staging a modest comeback in Asia today. US 10-year bond yields slipped below the 1.50% mark after a strong auction, with the whole US yield curve continuing to edge lower. Oil retreated modestly, as did gold, while commodities had a mixed night. The US dollar moved lower with US yields initially but recovered to be almost unchanged.

The divergence between equities and bond yields is intriguing. It suggests an element of either complacency or confusion about the US inflation data tonight, with transitory versus sticky argument clearly not resolved. Despite the gentle retreat this week, equity markets remain a hairs breath away from record highs, while the US longer-dated yields have fallen to lows not seen since Q3 last year. With gold, oil and commodities at or near multi-month highs, either the street thinks the inflation story is overdone, or there is a severe degree of complacency out there. US data over the past two months has not confirmed the story one way or the other.

With that in mind, tonight’s data should give markets a nice binary outcome. A MoM print of 0.50% or less should greenlight a return to business as usual by the buy everything trade. But a print after last month’s 0.80% MoM could see a nasty sell everything reaction as the street is now clearly positioned in its business as usual buy everything happy place. I’ll not hazard a guess, I mean forecast, on the numbers tonight. As asset classes go their own way into the US inflation data release, I will turn up Fleetwood Mac and chill from the sidelines. (Millenials: Fleetwood Mac are the original performers of Landslide, not these Dixie Chicks people)

Somewhat overshadowed in the US inflation noise, the European Central Bank announces its latest policy decision later today. The ECB should be as neutral as distilled water, with no change in rates or guidance on asset purchases. Only a slip of the tongue in the post-meeting conference mentioning the “t-word” is likely to provoke a market reaction. In that case, expect bunds to tank and the euro to jump.

Bitcoin made a huge comeback yesterday, rising over 10% after the El Salvador President confirmed the bitcoin would be accepted as legal tender. But, of course, we all know that, like meme stocks, reality is a disposable commodity like single-use plastic in the virtual currency space. So unless Elon Musk is going to Tweet that he is buying El Salvador, the country remains an economic basket case, and 99.99999999999999% of its people can’t afford even one bitcoin. The President might have had better luck using DogeCoin instead; it’s priced appoachably, and Elon likes it. My guess is the average El Salvadorean and Central American, in general, finds a good old fashioned US dollar bill more useful for transactions and as a store of wealth.

Meanwhile, the Wall Street Journal is running a story saying the meat processor JBS USA Holdings Inc. paid an USD11 million ransom last week in, you guessed it, bitcoin, to restore operations. Given that JBS processes 20% of American animal protein and American’s like their steaks, I believe this will be another step on the way to a watershed by governments to rein in the virtual currency sector. Whether Agent Smith of the FBI manages to step into the matrix and retrieve the ransom this time, or not.

Still, the rally is impressive, but my technical chart remains bearish, if only marginally so now. Bitcoin is trading around USD37,000.00 currently, and a daily close above USD38,000.00 will invalidate the bearish symmetrical triangle. Cue phone calls – sorry encrypted messages – by bitcoinista’s to their friends at Reddit to continue giving me an old-fashioned short-seller slapping.

US President Biden is heading to the UK for the G-7 leaders meeting with the administration, sending out mixed messages regarding China. On the one hand, it is clear from various comments that the President intends to maintain a hard line on China and will use the meeting to rally support. On the other, the President cancelled the TikTok and WeChat bans overnight. The China and US Commerce ministers also held a constructive phone call on trade this morning, according to Chinese media. As a result, Asian equities have edged up today, and the region appears to be focussing on the former and not the latter.

PBOC Governor Yi Gang has also been on the wires this morning. Among a plethora of comments, Governor Yi said CPI growth would ease back below 2.0%. He also hinted that the PBOC might loosen its grip on the yuan via adjustments to the basket mechanism. The yuan is modestly higher versus the US dollar after the comments.

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