Mixed markets hurt by earnings as USD rally stalls

Headlines

* US stocks were lower as losses in Meta and other megacap tech weighed

* ECB held rates steady at a record high of 4% as inflation and growth slow

* Strong US economic data and equity weakness not enough to boost USD

* US economy grew at 4.9% in the last quarter, fastest since 2021

FX: USD closed marginally higher for a third day in a row, which hasn’t been seen since the start of the month. Stellar data once again helped the buck initially on the US open, with bumper GDP and durable goods orders, plus core PCE was weaker than expected. Q2 growth of 4.9% begs the question: is this as good as it gets? But US Treasury yields gave back most of Wednesday’s gains with the 10-year closing near the lows for the week at 4.84%.

EUR was pretty unmoved during and after the ECB meeting and press conference. President Lagarde continued with the “higher for longer” mantra. But she also inferred more caution, especially with regard to the growth outlook. Inflation was seen falling in the coming months, with the impact of an oil price shock potentially mixed. It could be inflationary but also hurt growth. The euro fell through the US session but then clawed back nearly all its losses into the US close. A Reuters source story said policymakers agreed to debate an end date to bond reinvestments (PEPP) in early 2024.

GBP followed general risk sentiment and the euro lower. But cable eventually closed marginally higher on the day. The major is trading just above the mid-month lows around 1.2089/93. The long-term cycle low sits at 1.2037.

USD/JPY was choppy with prices backing off a new top made early in the day at 150.77. Prices dropped to a low of 149.81 before closing above 150. There was much intervention speculation but no official confirmation.

AUD printed a green candle after it dipped to a new low at 0.6270. The November 2022 trough resides at 0.6272 so could act as near-term support. The next level below is 0.6210.

CAD moved ever closer to the March year-to-date top at 1.3862. The BoC pretty much delivered on expectations. The bar to a rate hike remains high. However, the risk of higher rates will continue as progress on core inflation falling to target is slow. We had a dovish speech from Governor Macklem yesterday saying that the bank may not have to raise rates further.

Stocks: US equities fell again for a second day. The benchmark S&P 500 lost 1.18% to settle at 4137. That was its sixth daily drop in seven. There is a very widely watched zone of support around 4200.

The tech-dominated Nasdaq finished 1.89% lower at 14,110. The index has now fallen into correction territory. That means it is more than 10% off its highs. The Dow outperformed but settled down 0.76% at 32,784.

Blockbuster economic data failed to bolster market sentiment. Instead, more tech titan earnings upset markets. Meta was the latest member of the “Magnificent Seven” to disappoint, after Alphabet and Tesla. Amazon reported after hours and blew past expectations for revenue and earnings.

Asian futures are mixed. APAC stocks traded lower across the board on Thursday after the weak lead Stateside. Mainland China saw the shallowest losses amid stimulus optimism. The tech sectors drove the indices down with energy outperforming.

Gold printed a doji candle more or less so denoting some indecision. This is when prices close in between the high and low of the day and near yesterday’s close. Essentially, it is consolidation after the recent strong move higher over the month. Last week’s high sits at $1997 while this week’s low is $1953.

Day Ahead – Tokyo CPI, US Core PCE Deflator

Tokyo inflation data is seen as a precursor to the countrywide release in a few weeks. The headline is likely to cool to 2.7% mainly due to base effects. However, the weaker yen and higher energy prices could add upside risks. For the BoJ, Governor Ueda recently said inflation is likely to narrow the pace of its rise, then re-accelerate primarily due to wages. There is also speculation that the bank will raise its FY23 inflation forecast nearer to 3% and FY24 to 2% or above. That said, all the focus in the yen is on the 150 level with intervention warning lights flashing.

The release of the Fed’s favoured inflation measure wraps up the week. The headline and core PCE are both seen rising 0.3% m/m. But these are likely to fall going forward, with the annual core rate dropping below 3% and closer to the target. The focus will also be on Personal Income and Spending to gauge the strength of the US consumer. There is currently just under a 30% chance of a rate hike by January.

Chart of the Day – USDX uptrend tries to restart

All eyes will be on the US inflation data which closes out a choppy week. A hot report will increase the odds of another Fed rate hike in the next few months. However, a cool data set will help with evidence that the Fed is now done with policy tightening. Interestingly, the first cut is priced in by July. This is at odds with the Fed’s dot plot and higher for longer messages.

US “exceptionalism” remains front and centre for the dollar with data continuing to surprise to the upside. How long this lasts is key, as financial conditions tighten further. The multi-month dollar uptrend paused for a few weeks but now could challenge the October high at 107.34. Just below here is the halfway point of the September 2022 long-term decline at 107.17. 

(Sources: vantagemarkets.com)