Headlines

* Stocks pare gains, dollar steady before latest US inflation data

* JP Morgan’s trading desk sees S&P rallying up to 10% on soft CPI

* Gold stabilises after first day of losses in four, 200-day SMA at $1790

* UK private sector wage growth accelerates – highest outside pandemic period

FX: USD was flat in a narrow range day ahead of US CPI today and the FOMC tomorrow.  The 200-day SMA sits as resistance above at 105.80. US Treasury yields continued to rebound after hitting cycle lows last week. The 10-year yield has bounced from 3.42% to 3.59% currently.

EUR/USD was little changed at 1.0535 hovering just below recent highs at 1.0594. GBP/USD is similarly consolidating just below last Monday’s high above 1.23. Stronger wage data released this morning, the highest in a year, may support more hawkish pricing of the BoE. USD/JPY took a breather from its outperformance.

AUD trades below 0.68 with strong support around 0.6681. NZD is still aiming for the recent high at 0.6442. Gold lost ground yesterday and is contained by the uneventful greenback. The 200-day SMA is at $1790.

Stocks: US equities were firmer to kick off this hugely busy week. After selling off last week, the S&P 500 gained 1.4% and the tech-laden Nasdaq rallied 1.2%. The Dow was the outperformer, closing up 1.6%. There were no particular catalysts, with strength going into the final hour of trading.

Asian stocks traded mostly higher after gains on Wall Street.The upside was capped ahead of US CPI data and a bunch of central bank rate decisions. US equity futures are modestly in the green. European equity futures are firmer with the Euro Stoxx 50 future up 0.3%. The cash market closed lower 0.5% yesterday.

Day Ahead – All about November US CPI data

US inflation data has been the cue for sharp volatility in markets over the past six months or so. It was the main trigger for the recent dollar and bond yield sell-off. Consensus now sees the key core figure at 0.3% m/m, unchanged from last month and 6.3% y/y. The headline is forecast to slow one-tenth to 0.3% m/m and 7.3% y/y from 7.7% in October.

More signs of peak inflation should bolster the case for the Fed to slow the pace of rate hikes. A year-end risk rally and dollar selloff is likely to follow. An upside surprise could trigger another repricing of a higher terminal rate beyond 5% in 2023. This would boost the buck and hurt stocks and gold. According to Reuters, the S&P 500 has moved on average around 3% in either direction over the past six CPI releases. This compares with an average daily move of about 1.2% over the same period.

Chart of the Day – USD/JPY bounces from support

Today’s CPI release will set the tone for the dollar. This would be both into the Fed meeting tomorrow with its new dot plots, and the first quarter of next year. The market is pricing in around 50bps of rate cuts in the second half of 2023. A stronger set of data today or a pushback against easing financial conditions by Powell may help the buck and Treasury yields.

USD/JPY has sold off recently on the back of narrowing bond yields. The start of the month saw the major tap the 200-day SMA and rebound. This is now at 135.25. Prices are currently just above a long-term Fib level of this years’ rally at 137.24. The next upside target is above 139, the cycle low is 133.61.