Headlines

* Biden, McCarthy divided over debt ceiling but still talking

* US CPI expected to remain elevated as rate hike risks loom

* Stocks will rally if inflation data is soft, Goldman and JPMorgan say

* Asian stocks decline, gold rangebound ahead of data

FX: USD was stronger against most of its peers on Tuesday. The DXY rose 0.2% but it remains below 101.99, the 50% point of the 2021 rally. There was a lack of progress in debt limit negotiations. Staff will meet daily before President Biden convenes with congressional leaders again on Friday. The 2-year yield is higher for a fourth straight day this morning at 4.04%.  The 10-year yield closed yesterday at 3.52%. The 50-day SMA is at 3.54%. It hasn’t closed above that indicator since mid-March.

EUR traded to an intraday low at 1.0941 before closing 20 pips above. Its midpoint of the 2021 drop is at 1.0942. Strong support sits at 1.0909. GBP dipped to 1.2577 before closing back above 1.26. The one-year high is at 1.2668. There was little news flow ahead of the BoE tomorrow. USD/JPY is in the green for a fourth day today. Focus is on US CPI and Treasury yields. AUD paused its run of gains. It tapped the 100-day SMA at 0.6789. USD/CAD is consolidating below 1.34 with a narrow range day after its big selloff on Friday.

Stocks: US equities fell ahead of the inflation report and progress on the US debt limit. The blue-chip S&P 500 was down 0.46%. The tech-heavy Nasdaq 100 lost 0.68%. The Dow closed down by 0.17%. Trading was relatively quiet with investors sat on the sidelines. Regional banking stocks stabilised. The Fed’s Williams pushed back against a rate cut this year and noted the Fed are prepared to raise rates again if needed.

Asian stocks were mostly lower following the muted Wall Street handover. The Nikkei 225 softened after a deluge of earnings. The Hang Seng saw weakness in China’s biggest banks with property names also under pressure.

US equity futures are rangebound and very modestly in the green.  European equity futures are indicating a slightly better open (+0.2%). The cash markets closed down 0.6%.

Gold was uneventful as eyes turn to inflation data. The underlying bid from the soft dollar and yields is also seen through firm demand for exposure through futures and ETFs. A strong CPI will hurt the precious metal as Treasury yields will rise, firming up a potential rate hike.

Day Ahead – CPI to inform policymakers

US CPI is the marquee risk event of the week. Consensus looks for the core at 5.5% y/y and 0.4% m/m from 5.6% and 0.4% in March. The headline is expected to remain at 5% y/y and move higher to 0.4% from 0.1%. The increases would still be significantly above the Fed’s 2% target. The central bank has been raising rates to lower price pressures with the most aggressive tightening cycle in living memory. But it risks sending the economy into recession by hiking rates too fast and too high.

Last week, Chair Powell signalled a data dependent stance. We note the next CPI data is released the day before the next FOMC meeting in mid-June. Markets think recession is coming and still price in around 145bps of rate cuts over the coming 12 months. There is currently a 20% chance of a rate hike in June.

Chart of the Day – Nasdaq steadies near recent highs

Conflicting views abound in markets with the Fed still adamant there will be no rate cuts this year. The markets think otherwise. Cooler data today will keep the disinflation theme alive and should see a relief rally in stocks. A sub 5% headline reading would pave the way for the Fed to halt its tightening campaign. But an upside surprise in the core data will boost USD and could spark risk-off in stocks.

The Nasdaq 100 is especially exposed to the data and bond yields as it is packed full of high-growth tech companies. Their valuations are affected by Treasury and bond yields. The index has rallied strongly this year with the banking crisis boosting rate cut expectations. The February top is key support at 12,880. Bulls need to beat the recent top at 13,302 for more upside. The 100-week SMA is above at 13,439.