Headlines

*Strong rise in US core inflation suggests a major Fed hike incoming

*Dollar has biggest daily pct gain since 2020, verbal intervention in USD/JPY

*Wall Street outlook darkens after biggest loss in two years

*Asian stocks slump following CPI-inspired bloodbath in the US

*UK CPI headline rose 9.9% vs 10% expected, core 6.3% vs 6.2% estimate

USD rallied strongly after dropping below 108 on the DXY. Prices are now back above the previous July high at 109.29. EUR tumbled after failing again at long-term trendline resistance around 1.02. Prices are currently just above that mid-July bottom at 0.9952. GBP tanked to 1.1489 and closed on its low. USD/JPY soared to 144.68 before pulling back on talk of intervention. AUD nose-dived to 0.6733, its largest one-day drop since March 2020.

US equities suffered heavy losses especially in interest rate sensitive sectors such as tech. The Nasdaq fell a jaw-dropping 5.54% and the broader S&P500 was down 4.32%. That was its biggest one-day loss since June 2020. The Dow plunged 1,276 points or 3.94%. Asian stocks are declining with the Nikkei 225 falling below 28,000. US futures are marginally in the red.

Event Takeaway – Has US CPI peaked? Maybe, but it’s very sticky!

Well, we said there were upside risks to the core US CPI yesterday. We also wrote yesterday how rent and shelter would probably prove sticky. But the market was sucked into the “inflation has peaked” narrative. Underlying inflation measures actually increased to fresh multi-decade highs. This is important to the Fed. It has limited power to affect oil prices, which dragged the headline print lower, though still above consensus estimates.

The data means the chances of a 100bp rate hike at its meeting next week are now in play. They are currently priced at 32%. The FOMC would have to guide markets for this size of move informally, as it did in June, due to being in the blackout period. Any hopes that a peak in Fed funds is close have been scotched. The terminal rate is now seen around 4.2%. That implies 0.75% rate rise next week, then another full percentage point over November and December. Dollar bulls will aim for 110.78 on the DXY, and new lows in EUR/USD and cable. Gold may challenge strong support at $1677 as real yields touch 1% for the first time since 2018.

Chart of the Day – Nasdaq plummets, close to recent lows

Tech stocks are particularly sensitive to changes in rate expectations as valuations are based largely on future growth prospects. This meant the tech-laden Nasdaq was smashed yesterday as Treasury yields went into overdrive.  Facebook owner Meta and chipmaker Nvidia both lost 9% and Amazon shed 7%. Selling sliced over $100 billion off Apple and Microsoft’s market valuations. They posted their biggest daily losses since September 2020.

The Nasdaq 100 had been toying with the 50-day and 100-day SMAs, as we highlighted in Monday’s webinar. These act as initial resistance at 12,612 and 12,452 respectively. Bears will target this month’s low at 11,928. Below here, support is 11,488 and then the June low at 11,037.