A Look At The Week Ahead: All Eyes On Yellen, But CPI Will Be The "Trump Trade" Tiebreaker

Next week’s main event will be Yellen’s Humphrey HAWKins (as RBC bluntly put it) testimony in Congress starting on Valentine's Day in the House and continuing into Wednesday.

 

According to Bank of America, the market is underpricing the risk of a March hike. The bank's reasoning is that based on the view that with market pricing around 25% chance of a rate rise, Yellen may be tempted to try and increase those probabilities to close to 50% and make March live.

As BofA's Ralf Preusser adds, it is hard to see how Yellen can deliver a message that is more dovish than what the market is already pricing.

Bloomberg's Vincent Cignarella echoes the sentiment, writing that the dollar rally will also likely gain further momentum from Yellen’s testimony next week if the Chair leans hawkish, adding that That would probably raise the probability of a March rate hike closer to 50% from current odds of about 30%. Recently BlackRock Inc.’s Rick Reider said a March rate hike “is on the table,” given the Fed is close to its dual mandate on employment and inflation with the U.S. economy expanding.

Additionally, what’s sandwiched between Janet Yellen’s congressional testimony may prove to be just as important for currency and bond markets and may prove to be the "tiebreaker" when it comes to keeping the Trump reflation trade afloat according to the Bloomberg FX strategist. Even after President Donald Trump’s promise of a “phenomenal” tax plan helped send the dollar to its first weekly gain since December and triggered a resumption of risk-on sentiment, doubts remain over whether growth is strong enough for the Federal Reserve to tighten as much as has forecast for this year.

Trump’s pledge that his tax plan would come in two-to-three weeks lines up around when the so-called State of the Union address would likely take place, giving the former reality TV star a possible automatic prime-time national platform. That may be enough to maintain the dollar optimism in the meantime.

However, what’s sandwiched between Janet Yellen’s congressional testimony may prove to be just as important for currency and bond markets, and may be the tie-breaker when it comes to keeping the Trump reflation trade afloat. The one thing everyone should be keeping an eye on is the release of January inflation data on Wednesday between Yellen’s appearances before the House of Representatives and the Senate. While the Fed prefers to watch an index tied to purchases, the growing rate of consumer inflation and its erosion of disposable income by way of declining real household earnings is becoming hard to ignore. The CPI headline number has risen from below 0.5 percent in September of 2015 to a January forecast of 2.4 percent. That said, keep in mind that the bulk of the rise has been due to the anniversary of the "base effect" of gasoline prices, as well as surging rents. As the following CLSA chart shows, ex-shelter costs, core CPI is actually fading.

What does all this mean for the dollar? Here Cignarella says that the greenback as measured by the Bloomberg Dollar Spot Index closed above 1237.47, a mean reversion resistance. A sustained move above that level would likely see the dollar trade higher toward second reversion resistance at 1268.40.

The revival of the reflation trade and a response by the Fed that mirrors the central bank’s so-called dot plot for three rate hikes this year will likely set the tone for a long and sustained dollar rally. "Finally a trend impatient traders can bank on."

Here is what else to watch this week:

  • In the US, the focus will be on Chair Yellen’s Humphrey Hawkins testimony, but we also get inflation data, retail sales, industrial production, housing starts, Philly Fed, TIC data and several Fed speakers.
  • In the Eurozone, we get the second estimate of GDP, industrial production, and the German ZEW as well as the ECB minutes.
  • The UK data calendar is full of important data releases, namely inflation, labor market data and retail sales.
  • A light data week for Japan, with GDP the only release of note.
  • In Australia, the main focus will be on the labor market report, while we also get business and consumer sentiment and a speech from RBA’s Heath. New Zealand retail sales and Manufacturing PMI also coming up.
  • In the Scandies, focus this week will be squarely on Sweden, where we get the Riksbank meeting and several central bank speakers, as well as unemployment, inflation and inflation expectations. By contrast a quiet week for Norway with Norges Bank Governor Olsen’s annual address the only main highlight.
  • Little on the calendar in Canada, other than manufacturing and existing home sales.
  • In Switzerland, focus will be on inflation data.

A summary of key US events:

And global: