[Original Author, by Nigel Ng]
Prior to the latest CPI print, we saw many leading indicators that pointed towards softer inflation, including freight prices and the Manheim index. However, markets were surprised as core MoM CPI came in a massive beat at 0.6%, with shelter and OER lifting the CPI basket. Though it is well known that rents are a lagging indicator, the sticky inflation index sans shelter was still rising incredibly fast. Markets were very quick to price this in, with the short end pricing in a larger than 4% terminal rate.
Ultimately, the question isn’t so much about 75 vs 100bps in the next meeting, but rather what the terminal rate is going to be and how long are we going to pause before cutting. Once the peak terminal rate is priced in, that would be the time to short dollars. Preferably I would pick EUR as the opposing currency. Obviously, a recession/war/energy prices are not bullish the currency, but that’s mostly priced in now with gas flows at 0 and energy prices way off the highs. Winter is coming, but gas storages are amply prepared. EUR has also been surprisingly resilient against the dollar amongst the G10 currencies. The ECB is also determined to change their tone after decades of negative rates, acknowledging the inflation problem. Loose fiscal + tight monetary policy is bullish, not bearish a currency. In fact, I’m not even sure a recession in the US is that bullish USD. It might not be a bad tactical idea to start accumulating.
There are multiple central bank meetings this week but I’m expecting them to be non-events except for FOMC. The dot plot will provide more clarity on the Fed’s stance on monetary policy. Stay nimble until then.