US Open Note – Stocks fail to recover, dollar remains resilient

Elevated yields favour dollar, Canadian inflation in spotlight

The primary market focus remains centred around the Fed and how it will tackle inflation, with market participants juggling the premise of how many rate hikes will unfold this year. Expectations almost ‘guarantee’ three hikes but the dollar’s recent gains have been fuelled by rising Treasury yields, which have supported the dollar index around the 95.60 mark. US stock futures are somewhat finding their feet after the correction, while the 10-year Treasury yield has hit 1.84%.

New home starts in the US rose to the highest in nine-months by 1.7 million in December 2021, beating market forecasts of 1.65 mln as demand for housing remains elevated despite rising prices for building materials. Additionally, building permits hit an 11-month peak of 1.87 mln, well above market expectations of 1.71 mln. This is another positive for the US economy.

The yen is holding around the 114.50 level per dollar level, while gold ticks marginally higher to $1,818 /oz.

UK inflation at highest level since 1992, euro lags despite pickup in growth

Realistically, the ECB will stick to its guns in jumping onto the rate hike train, set to the timeline of October 2022 according to futures markets. That said, should persisting inflationary pressures and supply shortages weigh on economic growth in the eurozone, which has recently gained some momentum, bets of a hike could increasingly poke at markets.

The euro has failed to sustain recent headways, and should the dollar continue to lead, the common currency could remain subdued for a while longer (currently at $1.1335). EURGBP has slid close to the 0.8300 mark as the euro lags the better performing pound, which is also holding up better against the king dollar.

The pound improved to $1.3640 after ending 2021 with unexpected stronger yearly inflation data of 5.4% in December, higher than November’s 5.1%, and beating estimates. The core component also rose from November’s rate of 4.0% to 4.2% in December, while the old retail price index measure rose by 7.5% - the most since 1991.

The stronger inflation data in the UK today - mainly around soft consumables - has improved the odds that the Bank of England is most likely to proceed with raising interest rates in February, as this has underpinned the pressure households are currently facing. Households are encountering increases in everyday goods, while improvements in wages lag, and ministers are considering ways to soften another blow, estimated to hit households in April, that being a surge in utility bills.

Later today at 14:15 GMT Governor Bailey is due to speak regarding the BoE Financial Stability Report before the Treasury Select Committee, in London.

Oil uptrend intact and loonie firm ahead of CPI data

WTI futures are currently trading around $86.30 per barrel, above seven-year highs. Supply disruptions, production gaps on OPEC+ side, shrinking stockpiles and robust demand may be the perfect recipe to underpin oil further.

Canada’s headline inflation rate rose to 4.8% y/y in December from 4.7% in November of 2021. The acceleration in inflation was significant despite the ongoing supply shortages. The stronger inflation figures have likely cemented expectations of a Bank of Canada rate hike next Wednesday.

Furthermore, Canadian November wholesale sales rose by 3.5% m/m, exceeding the estimates of 2.7%, largely in response to elevated sales in building materials and supplies.

The Canadian economy remains very strong and dollar/loonie slipped for a test of the C$1.2450 low. However, dollar resilience has managed to refuel buoyancy in the pair, where the price has now steered back to C$1.2500.

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