Headlines

* Dollar breaks down as US inflation fuels hopes of slower Fed rate path

* Japan bond yield breaks BoJ’s new policy cap in test of resolve

* European equities shine on lower energy prices and China boost

* Asian stocks mostly higher in choppy trading, Japan declines

FX: USD traded to a new seven-month low following the release of the latest CPI report showed inflation cooled for the month. The DXY touched lows at 102.07 before closing just above. Yields on US Treasuries fell in choppy trading. The 10-year dropped below 3.5%.

EUR made fresh eight-month highs above 1.0850. It has held onto most of its gains this morning as it benefits from the dollar’s demise. GBP was very choppy trading in a range of 140 pips a few minutes after the CPI release. Brexit-related comments from a UK PM spokesperson noted that there were still major issues regarding talks. USD/JPY plunged 2.43% and is lower again today. It has touched levels last seen in June 2022. BoJ watchers are starting to anticipate a policy shift by the central bank sooner than previously anticipated. AUD broke to the upside after its bullish consolidation. It has posted new five-month highs close to 0.70. USD/CAD fell to 1.3345, just below support at 1.3352. That level is the halfway point of the August rally.

Stocks: US equities rallied after a whippy day of price action.  Wall Street’s blue-chip S&P 500 reversed an early dip to close0.34% higher for the day. The tech-heavy Nasdaq rose 0.5% marking a five-day win streak. That’s its first one since July. The Dow finished higher, up +0.64%.

Asian stocks were mostly firmer following the positive handover from Wall Street. The Nikkei failed to join in the global upbeat mood. A firmer yen and higher yields hindered markets as BoJ watchers expect a shift in policy sooner than thought. The HSI was kept afloat after press reports outlined details of China’s support measures for the property sector. Gains were capped amid a further deterioration in Chinese exports.

US futures are modestly in the red. Futures in Europe are flat.  The cash market closed up 0.7% yesterday.

Gold pushed up to close at $1896, a level last seen in May last year. Softer yields and the breakdown in the dollar are boosting gold bugs. Resistance/support is at $1896. That is a major Fib level (61.8%) of last year’s decline.

Day Ahead– Earnings season kicks off

Volatility was seen more in the FX space than stocks after yesterday’s US CPI data. But the start of the US earnings season could see this change. We get to hear from some big investment banks today with JP Morgan Chase, Citigroup and the Bank of America all releasing their Q4 earnings. Expectations are for another quarter of negative growth compared to a year ago. The interest rate shock last year hit investment banking activity. But higher interest rates should help net revenue figures going forward, especially if we only see a shallow recession in real terms.

For the overall Q4 earnings season, 7 out of the 11 S&P 500 sectors are expected to see earnings contract making overall S&P500 earnings growth unlikely. Only the energy, industrials, real estate and utilities are expected to show growth.  There will likely be more industries experiencing margin compression than expanding margins and that will be a major headwind for earnings growth. Current analyst estimates have not been materially revised down. That means that the upcoming Q4 earnings season and beyond is currently expected to be paved with more disappointments. 

Chart of the Day – S&P 500 hits resistance zone

The downward path of inflation looks to be deep-rooted now even though yesterday’s core inflation had some economists still worried. Most wage-sensitive components showed easing price pressures. Combined with lower average earnings in the recent NFP data, the figures ease pressure on the Fed to keep hiking rates aggressively. A smaller 25bp rate rise in February is now nailed on. The peak rate still oscillates just under 5% with money markets ignoring recent Fedspeak of rates needing to go higher.

Yesterday marked the first time the S&P 500 had risen three days in a row since early November. The risk rally has now hit the 200-day SMA at 3894. A long-term falling trendline will also offer resistance around the 4,000 mark, which is obviously a key psychological level. If we push north, bulls will target the November and December highs at 4,100. The 50-day SMA is initial support at 3,911.