The Final Piece of the Fed Puzzle

The Fed is confident that low oil prices will only produce transient disinflation and they believe signals from the bond market about low inflation are wrong but one element of the inflation picture irks them – non-existent wage inflation.  Existing Premium trades remain in progress ahead of the last trading day of the month.

The economic models the Fed relies on shows that as jobs rise, wages should rise as well but that hasn't been happening and it's left many members of the Fed waiting 'patiently' for it to appear. The first sign may have come Thursday in the CPI report. The overall report was close to expectations but one number stood out: average weekly wages rose 1.2% in the month compared to the 0.3% consensus.

The data led to one of the largest US dollar rallies so far this year. The euro tumbled more than 1.5 cents to the lowest of the month as the dollar surged right across the board. 

The USD got additional fuel from the durable goods orders report. Core orders rose 0.6% compared to 0.4% expected to halt six months of flat industrial order growth.

Technically, cable made a move to watch. It stalled just ahead of the 2015 high and the 100-day moving average and then collapsed 150 pips to form an outside day. Cable had been one of the best trades of the month but it stumbled badly with only one trading day left in February.

Looking ahead, it's a very big data for economic data in Japan. The market continues to fret about what the BOJ will do next and these numbers may be a critical input. The first numbers hit at 2330 GMT including household spending and employment. At the same time, CPI is expected at 2.4% in the January national reading at 2.2% in the Feb Tokyo reading. But watch the core reading, which is forecast to rise 2.1%.

At 2350 GMT, the focus moves to industrial production and retail trade. To wrap it all up, BOJ leader Kuroda speaks at 0230 GMT and may offer his take on the data and what's next.