Morning Brief – The Ultimate Cop Out?

The Ultimate Cop Out?

You’ve probably seen it a number of times in financial commentaries (but not of course, in our communications!) usage of the phrase: ‘It’s already priced in’. This can unequivocally be labelled as the ultimate cop out for misdiagnosing or simulating the outcome of an event upon a financial product. For example: if X happens, Y should sell-off. Then, when Y doesn’t sell-off and instead stands still or forbid even appreciates in value, the narrative shifts to ‘well, X must have already been priced in more than we thought’. The excuse therefore for failure is blaming the obscurity of the market for not translating the otherwise unflawed logic of the author into a perfectly prescribed market fallout.

Yesterday, multiple calls were put out into the market claiming that should inflation in the United States year on year to December 2021 be read at or above 7%, the Dollar would rally. 7% was the market consensus figure for inflation having previously been observed at 6.8%. The logic was that a figure of 7% would see inflation expectations upheld allowing the Federal Reserve’s rate hiking path to gain credibility and urgency thus raising the intrinsic return for holding the currency. A reading below 7% would undermine the Federal Reserve’s emerging hawkish tilt and cause the 3+ rate hikes priced in for 2022 to be questioned and even unwound.

Well, CPI inflation did come in bang in line with expectations at 7% with the core inflation rate running 0.1% hotter than expectations at 5.5%. Inflation showed itself to be pervasive across sectors. The prescribed market reaction, however, was wrong. Between the data release and the European close the Dollar lost more than 0.6% versus the Euro. US equities, commodity and emerging market currencies had a field day amongst the market fallout from the in-line inflation data.

The excuses? The Federal Reserve’s rate hiking path and hot inflation expectations must have been priced in more than we thought… In fact it was often conjectured yesterday that a lot of the market must have been positioned for an outpacing of inflation expectations once again in December leading to an even more aggressive rate hiking path than has grown as the consensus forecast. It still appears that this is wrong. From the sell off into the data event it is more clear that the market had overhyped the impact of monetary tightening within the US Dollar. The correction and failure to defend key technical levels has led to an exaggerated sell-off through to today’s session.

What remains true today is that the US Dollar’s value versus many of its G10 counterparts looks compressed. Particularly should risk conditions deteriorate, yesterday’s decline could have to be covered quickly.

Discussion and Analysis by Charles Porter

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