Dec 14, 2022 Daily briefing (US CPI Release

Dec 14, 2022 Daily briefing (US CPI Release - main event)

Hi Good morning folks,

"Our life is what our thoughts make it"

We had the release of the much awaited US CPI data. Headline CPI rose 0.10% mom (est 0.30%) and core CPI rose 0.20% mom (est 0.30%). CPI yoy grew at 7.10%. The CPI numbers show a declining trend from the peak of 9.10% in June 2022. The number was lower than the range of estimates. Market is pricing in a terminal rate of 4.835% for the May 23 Fed policy. Peak terminal rate expectations have shifted by a full 42 bps between Nov 4 and today. The expectations are for a 50 bps hike in today's policy ( Dec 14, 2022) and another 50 bps until the May 23 policy with rates peaking between 4.75% - 5.00%.

One interesting point about today's CPI print is the divergence between goods and services inflation ( chart below: source RealVision). The goods price inflation is coming off on demand weakness and de-clogging of supply chains. Andreas Larsen of RV points to the strong correlation between China - US Freight Rates and Good inflation; Maheim used car index and CPI used cars and trucks to show trends towards good disinflation. However, the services sector is more wage driven. It is driven by healthcare and education. The steady growth in average hourly earnings (0.60% in Nov 22) and average non farm job gains of 277k for last 4 months, the services component could be sticky and complicate matters for the Federal Reserve.

Coming to the market reaction, Risk assets rallied and US yields sharply dropped. The 2Y trades at 4.19% and the 10Y trades at 3.47% with curve inversion at 72 bps from a peak of 85 bps on Dec 7, 2022. For the Domestic markets, the 2Y OIS tested a low of 6.53% and 5Y 6.13%. Decline in market pricing of interest rate expectations has seen the forward curve bid, with 1 year 5 bps higher at 1.92%.

USDINR continues to face resistance at the upper end of the consolidation range of 82.40 - 82.65 and attempts to break 82.65 on multiple counts have failed. Upticks into the 82.65 - 82.90 band can be faded into. My own estimates of RBI intervention post 28 Oct are at $ 18 bn. Inr has recently under performed the broader USD weakness and my hypothesis is RBI would defend all time highs on the Rupee. December seasonality is also INR supportive.

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