Headlines:An early shift towards ‚peak inflation‘ on the day?Bond sellers take their foot off the gas pedalECB’s Lagarde: APP should be concluded early in Q3ECB’s Vasle says supports further, faster policy actionECB’s de Guindos: Euro area inflation to remain at 4% to 5% at year-endECB’s Müller: Appropriate to raise rates into positive territory by year-endMore from Villeroy: ECB will start raising rates this summerECB’s Villeroy: Inflation should be back at around 2% in 2024US MBA mortgage applications w.e. 6 May +2.0% vs +2.5% priorGermany April final CPI +7.4% vs +7.4% y/y prelimMarkets:AUD leads, USD lags on the dayEuropean equities higher; S&P 500 futures up 1.2%US 10-year yields down 6.3 bps to 2.930%Gold down 0.8% to $1,851.60WTI crude up 4.2% to $103.90Bitcoin up 1.7% to $31,517The focus on the day is on the US CPI release coming later at 1230 GMT but markets are seemingly running with the idea that we’re settling into the ‚peak inflation‘ narrative already.The dollar dropped while equities and bonds were bid throughout the session. European indices are posting solid gains of around 1.5% to 2.% while 10-year Treasury yields settled below the 3% mark, down 6 bps to 2.93% currently.In FX, the greenback held weaker across the board with AUD/USD up over 1% back above the 0.7000 mark while USD/JPY is down 0.5% to below 130.00 at around 129.70 levels at the moment.The better risk mood is helping with sentiment among commodity currencies, with USD/CAD dragged down 0.5% to 1.2960 – mired between large expiries at 1.2950 and 1.3000 on the day. The loonie is also benefiting from higher oil prices with WTI crude up over 4% to near $104 as Shanghai’s COVID-19 situation saw an improvement, bringing about hope for loosening of restrictions.All eyes now turn towards the inflation data in the US, so let’s see what that has to offer as it will likely set the tone for markets for the remainder of the week as well.

Prior +2.5% Market index 358.9 vs 351.8 prior Purchase index 255.4 vs 244.4 prior Refinancing index 913.6 vs 932.3 prior 30-year mortgage rate 5.53% vs 5.36% prior The average 30-year home loan rate in the US rose to its highest level since 2009 last week to 5.53% but that didn’t quite stop demand for mortgages, as applications ticked higher for a second week running. Despite the improvement in purchases on the week, it still doesn’t take away from the fact that the level is 8% lower than it was in the same week a year ago. The housing market continues to offer mixed signals with house prices still flashing double-digit annual price growth despite mortgage activity falling rather considerably since last year: US dollar

Lindner says that Germany must „find an exit from crisis mode“, noting that it is possible to return to the ‚debt brake‘ next year.But if there’s one thing that we’ve learnt during the pandemic is that fiscal spending knows no bounds and the numbers don’t really matter at the end of the day. If the rest of the world continues to get away with it, Germany might as well too.For some context, the ‚debt brake‘ is meant to work in the sense that Germany’s fiscal deficit should not exceed 0.35% of its GDP but has since been suspended due to the pandemic situation.

Just a couple to take note of for the day, as highlighted in bold.That being for USD/CAD at 1.2950 and 1.3000, which is arguably trapping price action ahead of the US CPI report release later in the day. The key risk event will eventually dictate sentiment and the market will reaction accordingly but for now, the expiries will perhaps play a role in keeping price action more limited.For more information on how to use this data, you may refer to this post here.

The focus on the day ahead of the US CPI report release is whether or not we’ve hit ‚peak inflation‘. In essence, it’s easy to argue that we are likely to see weaker inflation readings in the months ahead and that is perhaps all that markets care about – at least for now.But in the big picture view, I think one needs to make a distinction on what happens to the inflation outlook thereafter. A ‚peak‘ suggests that we are likely to see inflation pressures fall back down and towards central banks‘ 2% target in some pattern (one way or another). However, in all likelihood, we should see inflation hit more of a ‚plateau‘ instead in my view.There’s no easy solutions to the world’s problems in resolving the issues that have caused inflation pressures to skyrocket in the past year. And those issues aren’t going away just yet.While it is plausible to expect less hot inflation numbers moving forward, it doesn’t mean that we will see inflation pressures cool significantly.And that may present itself to be a problem for central banks in the latter stages of the year or early next year perhaps.While it is easy to hike rates when inflation is high and argue that it will eventually come back down to 2% some day, it isn’t so easy when that some day keeps getting pushed back further and further.At some point, policymakers may need to acknowledge that inflation pressures are going to be more persistent and sticky and if they are to try and combat that further, it may require tighter policy for longer. And in the case of the Fed, that could mean guiding the Fed funds rate to a higher terminal rate than expected.So, have we seen peak hawkishness by central banks? Maybe, at least in terms of what is priced in based on ‚peak‘ inflation. But what happens when markets start to turn towards an inflation ‚plateau‘ instead? That is going to be an interesting shift in perspective and pricing.Naturally, economic conditions will also factor into the equation for central bank policy moves but that will challenge their resolve in trying to defeat the inflation monster. I mean if the economy crumbles while inflation is still high with Fed funds rate at 3% or higher, the Fed will arguably have to admit that there has to be a policy mistake somewhere. That’ll be quite the moment.

Headlines:Risk on the mend but is it just a fleeting moment?EU’s Borrell: We continue to discuss sanctions, there are still some difficulties pendingUS April NFIB small business optimism index 93.2 vs 93.2 priorGermany May ZEW survey current conditions -36.5 vs -35.0 expectedUAE energy minister: Oil market is balanced, no need to pump moreMarkets:JPY leads, NZD lags on the dayEuropean equities higher; S&P 500 futures up 0.6%US 10-year yields down 8 bps to 2.998%Gold up 0.5% to $1,862.68WTI crude down 1.0% to $102.05Bitcoin up 2.5% to $31,700It was a quiet session for the most part as risk sentiment bounced back or at least steadied a little in the aftermath of yesterday’s bloodbath.European indices are settling higher though gains are still barely halving yesterday’s drop while US futures are up slightly but without any real conviction to turn around the sharp decline in Wall Street yesterday.It is still early in the day so the latest bounce may yet be a tentative one. The bond market is seeing some added bids, continuing from yesterday with 10-year Treasury yields testing 3% again at the moment.In FX, the dollar is keeping more mixed but is little changed overall amid some pushing and pulling. The greenback was weaker early on as risk recovered but is holding its ground for the most part now ahead of US trading.EUR/USD is not much changed, lingering around 1.0550-60 levels while GBP/USD is up just 0.1% to 1.2340 currently.USD/JPY is seeing a slight retreat from 130.20 to just below 130.00 as bond yields also fall back a fair bit. Elsewhere, AUD/USD is keeping flattish around 0.6950-60 levels mostly while USD/CAD is seen flirting with a firmer break of 1.3000. Both the aussie and loonie are looking vulnerable but amid a steadier risk mood are able to hold on for a bit more at the moment.

Resolutely focused on restoring price stabilityWe have a „sizzling“ hot labour marketFed task is difficult but not insurmountableFed actions will cool demand and factors contributing to supply shortages will be resolvedFed needs to be data dependent, adjust policy actions as circumstances warrantIt sounds like the string of 50 bps rate hikes is still the right call for the time being at least. Williams also adds that he expects PCE core inflation to be around 4% this year before falling to 2.5% next year. That is likely an outlook shared by most Fed policymakers and how they are going about the outlook for the Fed funds rate at the moment at least.

The struggle for solidarity continues for Europe. Borrell says that he hopes this can be resolved by next week’s foreign affairs council meeting but I don’t think one should hold their breath.

Prior 93.2US small business confidence was unchanged last month after three straight monthly declines but high inflation pressures and worker shortages continue to weigh on sentiment for the most part. Of note, 32% of businesses reported that inflation was their single most important problem – the largest share since Q4 1980.

There’s just one particularly significant one to take note of for the day, as highlighted in bold.That being the large chunk for USD/CAD at 1.2935, although it may not serve as too much of an attraction to price action considering that dollar bulls are pushing the boundaries of 1.3000 since yesterday. The lack of technical significance won’t help with the expiry level.If anything else, just be mindful that there will be some large expiries rolling off tomorrow as well for USD/CAD with the ones to watch being perhaps between 1.2950 and 1.3000.For more information on how to use this data, you may refer to this post here.