Stocks advance as USD pulls back in month-end choppy trade.

Headlines

* US spending rose at weakest pace in a year in Q2, pending home sales plunge

* USD eases and 10-year Treasury yield pulls back after making fresh high

* Wall Street rallies as oil price retreats from recent top

* Eurozone inflation poised for next decline on weaker German growth

FX: USD experienced its first down day since last Friday. The DXY saw its biggest one-day loss in two and a half weeks. This comes after pushing above the highs seen in January and March around 105.70. That said, the weekly initial jobless claims fell again so continue to show a strong employment picture.

EUR managed to hold its head above the year-to-date lows at 1.0488. There was another slide in European Government bonds as yields hit multi-year highs again. We saw mixed inflation data from German states with prices falling sharply on an annual basis. Buyers need to reclaim 1.0635 and above to slow the long-term downtrend.

GBP gained for the first time in six days. Cable had dropped to a fresh cycle low at 1.2110 yesterday. A moderate improvement in the broader market mood has helped steady sterling. The daily chart has been heavily oversold and outside of the long-term downward channel over the past few days. Gains above 1.2350 are needed to show more meaningful technical strength.  

USD/JPY has fallen modestly with markets reluctant to test the BoJ’s resolve. Wednesday’s top was close to the strongest since the 32-year peak at 151.94 hit last October. That triggered Japanese intervention and a 16% plunge.

AUD and NZD outperformed among the majors with the help of a marginally firmer CNY. AUD/USD prices have steadied above yesterday’s breakdown through 0.6350. Next week’s RBA meeting will contend with recent CPI data still well above target. But this was largely down to base effects and surging oil prices which means the bank should stand pat.

Stocks: US equities broke the two-day sell-off helped by a drop in oil ahead of the highly anticipated US and eurozone inflation data. The benchmark S&P 500 added 0.59% to settle at 4299. The tech-laden Nasdaq finished 0.84% higher at 14,702. The Dow underperformed, adding 0.35% to settle at 33,666. Communication names led the upside while tech saw solid gains. Utilities took the brunt of the selling with energy a laggard. Economic data was mixed with jobless claims still low but consumer spending a notable revision lower. But this was second-quarter data, so some are citing this as stale.

Asian futures are in the green following the US handover. APAC stocks traded mixed on Thursday heading into month and quarter-end. Commodity-related sectors saw strength, but this was offset by rising yields.  

Gold got no respite from an easing dollar. Higher for longer rate bets continued and saw bullion hit six-month lows at $1857. The lower-than-expected jobless claims and a fairly decent pace of growth in Q2 kept investors focused on the Fed. Eyes turn to the inflation data released later today with a hot report bad for precious metals.

Day Ahead – Inflation day

We get a double dose of inflation data today with eurozone figures followed by the Fed’s favoured inflation gauge. Expectations are for the former to fall to 4.6% from 5.2%. That would be the lowest rate since October 2022. The all-important core is seen slowing to an eleven-month low at 4.9%, from 5.3%. Energy prices will bring down the headline while base effects will drag on the core. A stronger report could see an October rate hike possibly come into play though the odds are currently stacked against it.

Consensus sees the US core PCE monthly number rising by 0.2% in August. Markets will frame the data to see if the Fed follows through with its projected one more rate hike this year. The FOMC raised its PCE forecast for this year but lowered its core figure last week at its meeting. Powell said the central bank would keep rates in restrictive territory until it is confident inflation is moving back to target.

Chart of the Day – Dollar Index takes a breather

The greenback had a rare red day yesterday. That is not surprising after rallying over 7% since its mid-July lows. Corrections have been few and far between. Again, “higher for longer” is the key theme for this strength which we have been talking about for some time on our weekly webinar. This is seen in rates markets where the low point in around three years is seen at around 4.29%. This was 3% in the spring and even below 4% last week. Surging oil has further fuelled the greenback rally. The March top at 105.88 and the January high at 105.63 are obvious points of interest. Just below here is a major Fib level at 105.38. Bulls will see sideways trading as healthy consolidation and could target above 107 if US data continues to highlight resilience. 

(Sources: vantagemarkets.com)