US: Focus on CPI data today – BBH

Analysts at BBH suggest that the focus today on US CPI may prove for naught and the consensus view is that the rise in US average hourly earnings spurred inflation fears and a sell-off in US Treasuries, triggering the slide in stocks.  Key Quotes

“Journalists and investors have put much weight in today’s CPI report.  We think it is too much, but will be looking at how the market responds to the news as an important reflection of market psychology.”

 “Specifically, the 0.2% and 0.3% rise in the core and headline rates respectively will be unable to prevent the y/y rates from slipping lower, due to the larger rise in January 2017.  We do look for US inflation to edge higher this year, but see it as beginning later in Q1 and running through early Q3.”

First, we note that the market appears to have nearly fully discounted the likelihood of a rate hike next month.  It has also priced in about a 60% chance of follow-up hike in June.  Second, as of February 6, speculators in the futures market had a record short 10-year Treasury position.  The yield has not been below 2.80% this week and put in the recent high on Monday near 2.89%.  The technical indicators favor consolidation or higher prices (lower yields).  Third, the S&P 500 closed higher yesterday for the third advancing session.  It finished yesterday a hair above the 38.2% retracement of its swoon (~2662.65).  The 50% retracement is a little below 2703.” 

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