Market Calm Before Expected Inflation Turbulence

North American equity markets have experienced two weeks of relative calm, with corporate earnings generally meeting expectations. Year-to-date, the S&P 500 and Nasdaq have risen by 9.45% and 9.1%, respectively, while Canada’s S&P/TSX has advanced by 6.2%.

This week, the U.S. Consumer Price Index (CPI), the main gauge of inflation, will be released. This report could significantly influence market direction. Last month's CPI exceeded expectations, supporting the Federal Reserve's stance on maintaining higher interest rates for a longer period, based on data dependency. The upcoming report is anticipated to show a 3.6% year-over-year increase, which remains high compared to pre-COVID levels.

Federal Reserve Chair Jerome Powell stated last month that more time and data are needed before considering lowering interest rates. Since then, the U.S. dollar has rallied, impacting other currencies. The Japanese yen has hit historic lows of 160 against the USD, as Japan continues its low-interest-rate policy.

European currencies have also weakened against the USD, with the euro trading at 1.08 USD. Emerging markets have suffered the most, though countries like Mexico and Canada have fared better due to their economic ties with the United States, experiencing less depreciation against the USD.

If the upcoming inflation report shows an unexpected increase, another round of U.S. dollar appreciation is likely.