USD strength remains the dominant theme ahead of Fed chair Janet Yellen's semiannual testimony before the Congress. Indeed, the narrow DXY index has gained +1.5% from its January 31 low while and the broader trade-weighted USD index has been gaining modestly. This marks the resumption of the reflation trade driven by Trump's pro-growth monetary policy. Outperformance of DXY index was partly driven by euro's weakness, given that the single currency contributes to over 55% of the index, compared with 17% in the trade-weighted index. Undoubtedly, euro's weakness has been driven by heightened political risks in the region. The rise in Treasury yields has recently been accompanying USD's strength. This is probably also a cause of USD's strength. US 2-year yields were flat near 1.206% while 10-year yields rose +2 bps to 2.43%.
In the commodity sector, crude oil prices retreated although Saudi Arabia noted that it has cut output more than required. The front-month WTI crude oil contract initially edged higher to 53.95 before retreating to 52.93, down -1.73%, at close. Meanwhile, the Brent crude contract climbed higher to 56.81 earlier in the day, but then pulled back to 55.59, down -1.96%, at close. This marks the first decline in 4 days for both contracts and we believe the price action was affected by USD's strength. Also affected by USD was the precious metal complex. The benchmark COMEX gold contract slipped for three days in a rose, dipping -0.81% on Monday and settling at 1224.4. The silver contract also dropped -0.6% for the day.
On the dataflow, headline CPI in China accelerated to +2.5% y/y in January, beating expectations of +2.1% and December's +2.1%. Core inflation, excluding food and energy, improved to +2.2% y/y, up from +1.9% in December. Food inflation rose to +2.7% y/y from +2.4% previously, while nonfood inflation rose to +2.5% y/y from +2% previously. PPI jumped to +6.9% y/y, compared with consensus of +6.6% and December's +5.5%.Improvement in China's inflation might prompt the government to consider monetary tightening. Staying in Asia Pacific, the final estimate of Japan's industrial production expanded +0.7% m/m in December, compared with consensus of, and November's, +0.5% gain.
Fed Chair Yellen's testimony is undeniably under the spotlight. Beside, US PPI would be released with the headline reading probably stayed unchanged at +0.3% m/m in January. Core PPI might have stayed unchanged at +0.2% m/m in January. From a year ago, the reading probably moderated to +1.1% y/y from +1.6% previously. The NFIB small business survey would also be released. In the Eurozone, we would receive revisions to 4Q16 GDP data, ZEW survey results for February and IP for December. UK would release its CPI data with the headline reading probably picked up to +1.9% y/y in January, from +1.6% a month ago. Core CPI might have improved to +1.7% y/y, form +1.6% in December.