A Sigh of Relief on Inflation

The market was searching for a trading theme on Thursday but inflation numbers didn't sound and alarms, at least for now. The Swiss franc was the top performer while the Australian dollar crumbled. Asia-Pacific data is light.

Two ideas held the market's attention at the start of the week. 1) The idea that the economy wasn't as strong as believed because of the disappointing jobs report and signs of weak December consumers. 2) Lingering fears about disinflation.

The solid retail sales report on Tuesday calmed fears about the consumer (although shares of Best Buy fell 29% today on slow Christmas sales). Today it the CPI report hit all the right notes with year-over-year inflation hitting 1.5% compared to 1.0% two months earlier. The report matched expectations across the board.

The market remains unsure where inflation is headed partly because policymakers don't have an idea. On Wednesday, the Fed's Evans called low inflation 'puzzling' and IMF Managing Director Lagarde said leaders need to be ready to fight deflation. Today it was Kocherlakota who called for dovish policies, including more forward guidance and potentially negative interest rates on excess reserves if disinflation worsens.

With the data, deflation worries will be placed on the backburner, allowing the market to focus on US growth.

Trading was light on the day and the general theme was mild USD weakness which was nothing more than a consolidation of the previous two days of USD strength. The larger theme this year is headline-driven trading. The market has been quick to jump on news so far this year and following the tape could be the theme of the year.

That was on clear display yesterday on the awful Australian jobs report. The initial move was swift and decisive but AUD/USD continued lower later and with the technical break to multi-year lows, the downside remains in focus.