Headlines

* Treasury yields and USD slide as producer prices rise less than expected

* Risk sentiment buoyed ahead of consumer inflation data

* Big tech rallies as investors bet on rate cuts

* US inflation set for sticky summer but core monthly remains on track

FX: USD turned lower after the softer than expected US PPI data. The tame 0.1% increase probably wasn’t as good as it looked. But it is consistent with the Fed’s preferred core PCE prices measure increasing at a below 2% annualised pace. Prices dipped to 102.87, a major Fib level of this year’s move higher. The dollar settled at the bottom of the G10 table ahead of US CPI data released today.

EUR dipped initially after poor German ZEW business survey data. But the bullish consolidation pattern we highlighted yesterday saw an upside breakout as the single currency rose versus the dollar into the release of the PPI data and afterwards. The spike high from “Manic Monday” sits at 1.1008. The March top is 1.0981.

GBP moved higher after the job numbers. Unemployment surprisingly fell two-tenths lower than expected to 4.2%. But that raised further questions about the reliability of the data rather than bringing any policy clarity. Wages fell but still remain sticky. Cable closed near its high for the day at 1.2872, just above the spike high from June, and now awaits UK CPI data.

USD/JPY printed an inside day in a relatively quiet day, ahead of the US inflation report. Treasury yields fell as bets on a 50bp September rate cut increased very marginally.

AUD moved above near-term resistance around the 100-day and 200-day SMAs, now at 0.6596 and 0.6602. NZD outperformed again, hitting the 50-day SMA at 0.6058. The RBNZ will likely cut rates by 25bps according to money markets, but consensus is more mixed.  USD/CAD is trying to break decisively down through the recent low at 1.3717.

US Stocks: US markets saw broad-based gains with tech again leading the ongoing rebound. The benchmark S&P 500 closed up 1.69% at 5,434. The tech-laded Nasdaq 100 finished higher by 2.5% at 19,006. The Dow Jones settled 1.04% up at 39,766. There was notable strength in the megcaps with Nvidia up 6.5% and Tesla advancing 5.3%. The only sector in the red was energy, weighed down by weakness in WTI and Brent on reports the Iran response may be limited. Hostage deal talks may also be taking place on Thursday.

Asian stock futures are positive. Asian stocks were generally mixed after similar performance on Wall Street overnight. The ASX 200 was subdued with tech and telecoms losses offset by gains in real estate and financials. The Nikkei 225 surged on its return from a three-day weekend, reclaiming the 36,000 handle. The Hang Seng and Shanghai Composite were both indecisive with oil stocks helping the former.

Gold consolidated its recent push higher by trading in a narrow range close to Monday’s high at $2473. It made a new top at $2476, just below the all-time peak at $2483. Yields and the dollar fell with all eyes on today’s data.

Day ahead highlight – RBNZ Meeting, UK CPI, US CPI

It will be a close call for the RBNZ with discussion about cutting or holding rates, with possible guidance that cuts are likely soon.  Inflation is falling and the labour market is cooling, largely in line with the bank’s May forecasts. But they also showed rate cuts were not likely until late next year. Domestic inflation does remain elevated and wages still strong. The 200-day SMA in NZD/USD is 0.6083.

Headline UK CPI is expected to print higher than the two prior months when it hit the BoE 2% target, at 2.3%. Core is seen one-tenth lower at 3.4% and services inflation is forecast to ease to 5.4%. The headline rise is largely driven by utility price base effects, but base effects could push services and core inflation lower due to a strong comparison with July 2023. There is one more CPI report ahead of the mid-September Bank of England decision. There’s currently around a one in three chance of another rate cut at that meeting.

Core monthly US CPI is the key number to watch in the US inflation data. This is forecast to print at 0.2%, the same as the headline m/m figure. Core services will also be watched as upward momentum gets taken out. Housing costs within CPI are finally moderating and we could see the smallest increase in nearly three years.  This is the first of two CPI reports before the September FOMC meeting.

Chart of the Day – Dollar breakdown?

Markets could overreact to any inflation surprises due to low liquidity during the summer holidays. That is also true because ahead of the FOMC rate decision in September, money markets are torn between a 25bps or 50bps rate cut which is currently priced at just above a coin toss. A downside surprise could cement expectations for a 50bps Fed rate cut in September and an aggressive interest rate cutting cycle ahead. That could push the dollar index down nearer to its ‘Manic Monday’ low at 102.16.

An upside inflation shock could lead to reduced rate cut bets and “only” a 25bps move or even less. The 108 bps of policy easing forecast in markets by year-end would also get reduced and the dollar would likely get a boost. Near-term resistance sits at 103.54/56.