US CPI Now In Focus

Headlines

* S&P 500 notches highest close in more than a year   

* US inflation set to have cooled to its lowest level since early 2021 

* Dollar dips ahead of US CPI data, central bank meetings

* Sizzling UK jobs data as earnings and unemployment beat estimates

FX: USD is tracking sideways after making a new low at 103.24 before settling at 103.62. The 100-day SMA is at 103.02. The 2-year yield moved up to the May top at 4.63% before closing just below. The 10-year yield finished at 3.73% after touching 3.79%. The 200-day SMA is at 3.67%.

EUR is bid today and aiming to get above 1.08. Recent price action has been choppy with resistance around 1.0788. GBP made a new high at 1.2599 before closing at 1.2505. Today’s jobs data came out stronger with average earnings ex-bonuses at 7.2% versus expectations of 6.9%. That’s a new record high. The jobless rate was also better at 3.8% vs 4% expected. The peak rate in the UK is now seen at 5.7%. USD/JPY traded in a narrow range above 139.  AUD has enjoyed eight positive days in nine. The major is now above the 100-day SMA at 0.6734 which has been resistance before. The top of the recent range is at 0.68. USD/CAD is consolidating around 1.3350. Strong support sits just below at 1.33.

Stocks: US equities were strong with fresh year-to-date highs led by gains in big tech. The blue-chip S&P 500 traded 0.93% higher. It closed at 4340, its highest since mid-March 2022. The tech-heavy Nasdaq outperformed again surging 1.76%. The top at 14,789 was also the highest in 14 months. The Dow only managed gains of 0.1%. Stocks remain well below the all-time highs hit at the start of 2022 but are up strongly this year. Tech leads the way with semis and software advancing 33% and 19% in the past 12 months. Tesla continued its recent impressive run by registering 12 straight green days. Oracle saw a 3.6% rise after reporting a 54% rise in cloud revenue during fiscal Q4.

Asian stocks traded mostly higher after Wall Street’s strong gains. Markets digested the PBoC’s rate cut. The Nikkei 225 continued its outperformance and broke the 33,000 level for the first time in over three decades. Autos and Softbank led the push higher. The Hang Seng was subdued again amid ongoing growth concerns and US tensions.   

US equity futures are indicating a better open with S&P 500 futures just below 4,400.  European equity futures are indicating a better open (+0.7%). The Euro Stoxx 50 closed up 0.6% yesterday.

Gold was rangebound tracking around $1959. Traders are awaiting the US CPI data and then the FOMC meeting tomorrow.

Day ahead – US CPI kicks off a big week

A week full of big risk events starts with today’s US inflation data. Monthly headline CPI is expected to rise 0.3% in May, a little cooler than the prior 0.4% while the annual gauge is seen easing to 4.1% from 4.9%. That would be the lowest reading since March 2021. The headline will be driven by a 3.0% decline in energy prices and food prices are anticipated to increase slightly. The core measure, which strips out volatile food and energy prices, is forecast to rise 0.4% m/m, matching the pace in April; the annual core measure is seen cooling to 5.2% from 5.5%

We will be watching the monthly core reading. An upside surprise could be sufficient to move enough FOMC officials to vote for a 25bp hike on Wednesday. The Fed is keen to see monthly CPI prints of 0.2% or below as these are needed to bring inflation back to the central bank’s target of 2%. So if we get any signs of this today, then the dollar would fall and risky markets cheer as we may have seen the peak in US rates. 

Chart of the Day – Gold stays rangebound awaiting a catalyst

Gold continues to track sideways pretty much rangebound between $1940 and $1980. The struggle for momentum is highlighted by its struggle to break above the 21-day SMA around $1965. After today’s US CPI numbers, a hawkish skip is expected from the Fed tomorrow. A strong inflation report and rising odds of a rate hike would certainly hit gold bugs. But soft CPI and hints, perhaps in the dot plot that we are at the end of policy tightening, would push the precious metal higher.

Prices are currently oscillating around $1959, the early February high. We are just about holding at the bottom of the long-term bull channel. Support is seen at the 100-day SMA at $1941. The 50-day SMA is just above the top of the recent range at $1989.