Headlines

* Bets on September Fed hike shrink after latest CPI report

* RBA’s Lowe keeps door open to further rate hikes

* Poll: ECB to pause in September say slim majority of economists

* UK economy picks up pace in second quarter with 0.2% growth

FX: USD had another choppy session. It sold off initially to 101.78 after the CPI data. But it eventually closed marginally higher on the day at 102.62. It remains above both the 50- and 100-day SMAs at 102.22/30. The 10-year yield held 4% and jumped up to 4.10%. The 2-year yield bounced off support at the 50-day SMA at 4.78%. A 30-year auction was weaker than expected.

EUR made a two-week high at 1.1064 before closing nears its low below 1.10. The August ECB Economic Bulletin noted a “turning point” in underlying inflation pressures had been reached. This indicates that policymakers may be more comfortable holding rates steady.

GBP fell for a third straight day yesterday. It settled at 1.2675 but is better bid this morning after stronger-than-expected GDP. The economy grew by 0.2% in Q2 versus the 0.1% estimate. It still leaves quarterly GDP 0.2% below its pre-Covid peak.

USD/JPY enjoyed its fourth consecutive day of gains. The major added 0.7% to close in on 145. This was a supposed “line in the sand” for Japanese authorities to intervene in the yen.

AUD spike up to 0.6616 before finishing at 0.6514. USD/CAD is bumping up against its 200-day SMA at 1.3448.

Stocks: US equities were muted on Thursday after initially enjoying the softer headline US CPI. Rising yields and hawkish-leaning Fed comments weighed. The benchmark S&P 500 closed very modestly higher at 4468. The blue-chip index gave up gains of more than 1%. The tech-laden Nasdaq added 0.18% closing at 15,128. The Dow gained 0.15% finishing at 35,176. Disney stood out as the best-performing stock. It rose 4.9% as investors welcomed the entertainment giant’s plan to raise subscription prices.

 Asian stocks traded mostly lower after the post-US CPI unwind.  Chinese stocks dropped amid Chinese developer concerns. The flip side saw Alibaba outperform with a top and bottom line beat in its latest results. The Nikkei 225 was closed for a public holiday.

US equity futures are marginally in the green. European equity futures are pointing to lower open (-0.6%). The Euro Stoxx 50 closed up 1.6% yesterday.

Gold fell for a fourth straight day to over one-months lows. Prices made a high at $1930, before closing at $1912 and below long-term trendline resistance. The precious metal is on course for its worst week in seven as yields and the USD remain buoyant.

Data Breakdown – US CPI moving in the right direction

US inflation for July showed prices rose at 3.2% y/y, marginally lower than the 3.3% expected. More importantly, the headline m/m printed below estimates at 0.17%. The core print also came in lower than expected at 0.16% m/m. That is good news for the Fed who need a series of muted monthly gains to bring inflation back to target. Markets see very little prospect of a 25bp hike in September. But they still give that a one in four chance in November. This was due to services prices which accelerated after a very low June reading.

The disinflation theme mostly rests on the assumption that shelter costs will come down amid the lagged effect of housing, while other components stay low. Rising oil prices may push the August headline print higher.  That release comes just ahead of the FOMC September meeting. The ongoing tight labour market remains an upside risk for inflation. But credit conditions are likely to tighten further in the second half. That should result in the falling price pressures continuing and signal the Fed’s work is done.

Chart of the Day – USD/JPY nears 145

Treasury yields moved higher yesterday and pushed USD/JPY up to test a key resistance level. Japan intervened in markets last September when the greenback advanced past 145. The Ministry of Finance bought yen to weaken the pair. That brought the major down to around 140. But the Japanese currency remains by far the weakest major G10 currency. It is down more than 9% against the dollar this year and over 2% just this week. Equity outperformance and muted volatility, as well as rising oil prices are headwinds for the yen.

The dollar did also not sell-off after the encouraging CPI data yesterday. There seems to be a lack of alternatives currently with both the eurozone and China economies slowing. The line in the sand is 145. Expect more jaw-boning from officials. Initial support is 143.88 and 146.63.