Dollar Seen Winner As Markets Brace For Even Faster U.S. Inflation

(Bloomberg) -- The dollar has scope to extend gains and stocks are likely to keep falling if US inflation data Wednesday show a further acceleration, according to strategists. 

Other predictions include further inversion of the US yield curve, renewed weakness in the yen and the euro finally being pushed below parity with the greenback.

The US consumer price index probably climbed to 8.8% in June on an annual basis, from a 40-year high of 8.6% the previous month, according to a Bloomberg survey of economists before the data is published at 8:30 a.m. in Washington. The Bloomberg Dollar Spot Index has already gained 10% this year.

Here are a selection of views from strategists and analysts:

BlackRock Investment Institute Asia Pacific investment strategist Ben Powell

• Markets are going through a paradigm shift from a fairly loose policy era with low inflation and low rates, to an inherently more volatile world shaped by supply, he said on Bloomberg Television
• It’s going to be a more challenging macro backdrop
• “We think investors of all types now have to be a bit more nimble, and I guess a bit more focused around selectivity, rather than just a broad buy-any-dip-that-we-see mentality. Fundamentally, central banks are not there for us in the way that they have been over much of the last several decades”
• US CPI print to come on Wednesday is likely to be high
• The Fed will continue to stress its hawkishness to preserve credibility
• Dollar strength and equity weakness may persist for some time

AllianceBernstein Holding LP co-head of Asia Pacific fixed income Brad Gibson

• The market needs more than one CPI print to show it’s peaking out and rolling over, he said on Bloomberg Television. “We do expect that to occur in the later stage of this year”
• Market is expecting a headline CPI slightly above last month, but core inflation might come down a bit. However, the situation will not be enough for the bond market to react strongly to change its yield-curve flattening bias for now
• “It does feel like inflation this time is different to what we’ve experienced in the last even two decades. That playbook of the yield curve getting down to these levels and then potentially re-steepening may not be the playbook”
• There’s more room for the yield curve to invert further. With the rate differentials, real yields, there is probably room for the dollar to continue to appreciate

Pepperstone Group head of research Chris Weston

• “A CPI print below 8.5% would get the rates bulls fired up, with bond yields down hard, subsequently, I’d imagine (in this scenario) the dollar drops universally, crypto goes up 5%+, Nasdaq 100 +2.5% to 3%, and gold +1.5%, he wrote in a research note
• Conversely, a number above 9% could validate the market’s long US dollar position and reinforce the notion that inflation is going to be high for the rest of the calendar year
• “It should take USD/JPY firmly back above 137, EUR/USD below parity and see commodities under pressure”

Banrion Capital Management founder and president Shana Sissel

• Market reaction will be negative if US consumer prices come out slightly higher than expected, but not necessarily with the same negativity in the last quarter, she said on Bloomberg Television
• The market will not “freak out” because of the already existing negative sentiment
• “I just think there’s overly negative sentiment that we have. I think we’ve gotten overdone with the negative sentiment at this point”
• In-line or better-than-expected numbers will have the potentials to drive the market upwards. The markets are expecting bad inflation numbers, but signs of easing are showing in commodities

TD Securities team including global head of rates strategy Priya Misra

• High headline inflation is likely to move two-year Treasury Inflation-Protected Security break evens higher
• “We have doubled down on our long position as we look for near-term inflation to remain elevated”
• TD remains long 30-year real rates as the market pencils in greater risk of Fed rate hikes slowing growth momentum

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