Headlines

* China files complaint with US over tech investment curbs

* US inflation is expected to reflect moderate price growth

* USD in holding pattern as US CPI test looms

* Asian stocks are mixed while investors digest earnings and US/China news

FX: USD traded in a narrow range day in a choppy session. Catalysts were light as markets eye the US CPI data.  The 10-year yield is still clinging onto the key psychological 4% mark. The 2-year yield found support at the 50-day SMA at 4.77%. US CPI will impact the recent USD rally. But robust activity data could trump inline prints if markets wait for the September CPI data.

EUR settled higher at 1.0973. It traded in a narrow range of 1.0950 to 1.0995. The 50-day SMA is initial support at 1.0956. The Italian government caved in late Tuesday on the windfall tax on Italian banks. They said it would be capped (at 0.1% of risk-weighted assets). That means the potential cost may be significantly lower than first feared.

GBP slipped towards 1.2721. It is now below the 50-day SMA at 1.2760. Today’s release of the RICS UK house price data survey showed the most pessimism over UK house prices since early 2009. The question is whether this starts to feed more heavily into UK consumer confidence and spending. The 50bps of more BoE tightening might also then be affected.

USD/JPY closed at 143.72 near to its highs for the day. It has made fresh one-month highs above 144 this morning. Policy divergence and rate differentials are again helping.

AUD fell again but is making back those losses today above 0.6550. USD/CAD popped up to the 200-day SMA at 1.3448 but is trading around 1.34 this morning.   

Stocks: US equities ended lower on Wednesday. The benchmark S&P 500 lost 0.70% to finish at 4467. This was dragged down by tech stocks. Nvidia sunk 4.7% making it one of the worst performers in the index. The Nasdaq shed 1.17% closing at 15,101. The Dow fell 0.54% settling at 35,123. The KBW Bank index fell 1.7%. That continued its slide from Tuesday after Moody’s downgraded 10 midsized US lenders.

 Asian stocks traded mixed with most bourses rangebound.  Chinese stocks were pressured after US/China geopolitical tensions were turned up. The Nikkei 225 benefitted from yen weakness. There was mixed PPI data and news flow dominated by earnings.  

US equity futures are firmer. European equity futures are handsomely in the green this morning (+1.15%). The Euro Stoxx 50 closed up 0.7% yesterday.

Gold dropped to one-month lows at $1914. Prices are now trading below the long-term rising trendline from February. Short-end yields have been higher overnight. Investors are braced for the latest US inflation report. This will shape the Fed’s upcoming September meeting. Stronger-than-expected figures will bring back inflation worries and further weigh on gold.

Day Ahead – Markets look for slower US CPI

Friday gave us a mixed US NFP jobs report that continued to provide conviction to markets that the Fed can pause hiking. Today’s focus turns to July inflation. Consensus expects headline CPI to accelerate to 3.3% y/y in July from 3.0% in Jun. But this is likely to stay unchanged at 0.2% m/m. Core CPI is forecast to moderate to 4.7% y/y while remaining at 0.2% m/m.

The headline will pick up due to unfavourable base effects. The sharp fall last summer in energy prices will drop out of the annual comparison. Risks continue to escalate from weather patterns and six consecutive weeks of gains in oil prices. If inflation undershoots consensus expectations, the disinflation theme will continue to gain traction. That should support risk assets and gold. Falling prices in core services will be under the spotlight. Shelter inflation is the biggest driver of services inflation. It now appears to be easing with the expected 12-month lag from measures of new rents and house prices.

Chart of the Day – S&P 500 below 4500

Equity markets have been trading in choppy fashion recently. It is the summer as noted earlier this week. That means volumes are light and we can see sharp, moves. Notably yesterday, we had weakness in semiconductor stocks. Industry bellwether super Micro Computer is a customer of Nvidia. It plunged 23% despite strong results. But it released a disappointing 2024 revenue outlook. The Biden executive order to limit sensitive technology investments in China may have also added fuel to the weakness.

US CPI will direct price action today. Stocks hope for more softness to cement the disinflation theme. That said, we note there is one more CPI report the week before the September FOMC meeting. The benchmark S&P 500 has come off recent highs. That had pushed the index into bull market territory (+20%) from its lows in March. Prices are approaching the lower end of the long-term bull channel. This denotes a series of higher highs and higher lows. Support should come at the 50-day SMA and bottom of the channel around 4427.