FTSE enjoys positive start, as China moves out of deflation

• Ueda helps lift the Yen, warning of higher rates if inflation fails to normalize
• FTSE 100 outperforms as Chinese CPI lifts mining stocks
• US CPI and ECB meetings key to busy week ahead

The Japanese yen continued its recent volatile pathway, with comments from BoJ Governo Ueda sending the currency sharply higher on the prospect of tighter monetary policy to come. The discussion over an end to negative rates in the event of an inflation and growth overshoot does raise the possibility of an eventual exit from the current dovish monetary policy position around year-end. While we have seen both inflation and growth metrics come in below estimates, with traders aware that these comments could simply be an effort to limit the yen’s decline without making any material policy adjustment. Nonetheless, these comments create a narrative that should introduce greater yen strength if we do not see a material normalization in Japanese data over the coming months.

The FTSE 100 has powered out the blocks at the open, with the index enjoying a strong start ahead of a key week of data. Overnight data out of China appears to have helped lift mining stocks in particular, with the country moving out of deflation territory helping to provide some sense of stabilization in a sea of uncertainty. Meanwhile, a rebound in new loans helped allay fears of a credit crisis after last month’s 13-year low. Looking ahead, today will see a focus on the appearance from Bank of England member Pill, whose recent comments have largely centered on the need to do more in the face of consistently elevated inflation data. His warning over the possibility of a second price spike have come into focus after WTI hit a 10-month high last week, with the Bank of England already struggling to contain the first phase of this crisis.

This week sees a raft of market-moving data releases, with US inflation and the ECB meeting expected to provide plenty of volatility given the shifting interest rate expectations in recent weeks. Energy prices are becoming increasingly important as a driver of inflation expectations, and OPEC+ are expected to continue their assault on the world’s disinflation efforts as they seek to drive up prices through output restrictions. The recent positive correlation between the dollar and energy prices serve to highlight the risk posed by higher energy prices.