Global financial markets are growing increasingly nervous ahead of tomorrow’s US inflation report. The dollar is up, yields are inching higher, and equities are down. Implied volatility levels are slightly elevated, and risk-sensitive currencies like the Canadian dollar are on the defensive. 

Today’s data calendar is light, with the Federal Reserve’s Michelle Bowman discussing topics unrelated to monetary policy, and Japan reporting fourth quarter gross domestic product. 

January’s consumer price index update could prove destabilizing for markets that have spent much of the last four months betting on a rapid easing in inflation pressures. The Bureau of Labor Statistics is expected to report a 0.5% month-over-month increase in its headline consumer price index, up from a revised 0.1% in December. Core prices are seen climbing 0.4%, matching the prior month’s gain. On a year-over-year basis, economists think prices advanced 6.2%, with the core gauge climbing 5.5%. 

Newly-recalculated seasonal adjustment factors might help soften the psychological blow, but higher gasoline costs, smaller declines in goods prices, and stubbornly-strong services demand could generate an upside surprise that raises expectations for Fed hikes – and lifts the dollar. With market participants still heavily short the greenback—particularly against the euro—the potential for a squeeze is real. 

Retail sales data, set for release on Wednesday, could also support renewed bets on a higher-for-longer policy stance. Real-time spending data suggests that American consumers increased outlays on vehicles, gas, and restaurant meals in January, with strong income gains and a still-robust employment backdrop helping alleviate the typical post-holiday hangover. 

A raft of data is also set for release this week in the United Kingdom, with still-robust evidence of underlying inflation pressure likely to keep the Bank of England on a relatively hawkish footing for now. Tomorrow’s fourth-quarter labour market report should show the unemployment rate holding steady, vacancies remaining at elevated levels, and wage gains running well above levels consistent with monetary policy objectives – private sector pay is seen rising 7.2% year-over-year, while a broader measure that includes the public sector probably accelerated from 6.2% to 6.4%. January’s consumer price index numbers, out on Wednesday, should show headline inflation decelerating to 10.3% year-on-year from 10.5% in the prior month as gasoline prices fall, but the core measure might remain surprisingly strong as services spending holds up. 

We note that markets failed to react after the US shot down three unidentified flying objects over Alaska, Michigan, and Canada this weekend. We’re convinced the three “cylindrical, silverish” craft were dirigibles, but if they turn out to have been of extraterrestrial origin, we would suggest rehearsing your Bill Pullman-style Independence Day speeches and buying the dollar. The greenback tends to perform well in conflict situations, and this particular group of aliens is now almost certainly very annoyed.