Stocks and bonds rise despite hot PPI, on eve of CPI.

Headlines

* Fed minutes flag high rates for “some time” while risks shift

* US CPI expected to remain stubborn to the core

* Gold rises again on safe haven demand, dovish Fed signals

* Dollar falters as bond yields decline ahead of US CPI

FX: USD fell for a sixth session in a row. Yields have carried on correcting with the Fed potentially letting markets do its work for them. That means no need for one more rate hike as predicted by the most recent Fed dot plot. But the more rates fall, the more policymakers may them need to tighten. The FOMC minutes were largely as expected with a cautious stance evident.

EUR continued higher close to a three-week top as it nears the May low at 1.0635. ECB inflation expectations edged up which could reinforce the high for longer ECB rate outlook. We note that yield and growth troubles remain potentially making prolonged upside tough for the euro.  

GBP climbed above 1.23 to a three-week high and closer to the topside of the long-term descending channel seen since the July top. Short covering seems to be a chief driver as there are few sterling drivers at present.

USD/JPY continues to consolidate around 149 and above the 21-day SMA. The 10-year US Treasury yields slid and has moved 30pips in three day.

AUD paused after five straight sessions of gains. The 50-day SMA sits at 0.6434. RBA Assistant Governor Kent stated monetary policy is slowing demand growth and inflation. But policy lags mean some further effects of past rate hikes are still to be felt in the economy. He repeated guidance that some further policy tightening may be required.

Stocks: US equities closed up for a fourth straight day, which was last seen at the end of August. The benchmark S&P 500 added 0.43% to settle at 4377. The tech-laden Nasdaq finished 0.72% higher at 15,241. The Dow underperformed but closed up 0.19% at 33,805. Price action was choppy again but ultimately firmer into the close. The Fed’s Waller, a known hawk, was the latest official to say higher bond yields and the tightening of financial conditions will do some of the work for the central bank.

Asian futures are pointing higher after another a green day Stateside. APAC stocks up on Wednesday after positive momentum from global peers. Chinese stimulus hopes and dovish Fed rhetoric are keeping sentiment relatively upbeat. The Nikkei 225 breached 32,000 to the upside.

Gold rebounded further with another solid day of gains (+0.73%).  Falling Treasury yields and war in the Middle East with haven demand are again acting as tailwinds. The August low at $1884 is the next upside target for bugs.

Day Ahead – US CPI incoming

We get the last US inflation report, before the penultimate FOMC meeting of the year at the start of next month. The data will show if the disinflation trend is slowing, or that process remains in play as the Fed tries to bring back inflation to target. Consensus sees 0.3% monthly readings in both the headline and core prints, which would be the same rate as in August for the latter. But falls are likely in the annual figures with the headline expected to at 3.6% in September which would mark a one-tenth drop from August. The core figure, which strips out volatile food and energy costs, is forecast to fall to 4.1% year on year. That would be the lowest level in two years.

Crucial for policymakers, and so markets will be the core month-on-month data. This has averaged 0.2% over the last three months and is needed over a prolonged period to push CPI back to 2%. Last Friday’s blowout jobs report and spiking oil prices could influence the headline figures and underlying price growth in the months ahead.  An upside surprise in the data will cause markets to readjust their bets on the chances of another rate hike this year. These are currently only given less than a 30% chance so a move back nearer to 50% will fuel another upleg in the USD.

Chart of the Day – DXY fall continues

Last week’s close on the DXY was bearish with price action printing a “shooting star” candlestick pattern. This forms when prices rise significantly but then close near the open price. So, the candlestick has a long upper shadow and virtually no lower shadow at all. The DXY also stalled around the 50% retracement of the 2022/2023 drop at 107.17.

Notably, the reversal in the uptrend came after eleven consecutive weeks of gains which is exceptionally rare in major currencies. The index is now on a losing streak of six straight daily losses which has only been seen once this year. Prices have also dropped out of the long-term bull channel seen since the July lows. The next major Fibonacci level sits at 105.38 and may act as support.

(Sources: investing.com, reuters.com)