Headlines

* US April CPI data keep Fed on course for a June pause

* ECB officials start to accept rate hikes might not end in July

* BoE set to crown hiking campaign with one more rate rise

* Asian stocks rise, Dollar sinks as US yields depressed post-CPI

FX: USD fell against most of its peers, trading off 0.24%. There were no upward surprises to the US inflation data which caused some mild dovish Fed repricing. Comments from WSJ’s Timiraos noted Fed officials were leaning towards taking a “summer vacation” from rate hikes and the April inflation report makes this easier. The 2-year yield dropped below 4% to close at 3.91%.  The 10-year yield fell to 3.44%. A “death cross” is seen on the charts. The 50-day SMA has crossed through the 200-day SMA potentially pointing to lower yields.

EUR touched the 50% Fib level of the 2021 drop at 1.0942 again and rebounded, though it is still trading below 1.10. GBP popped up to a fresh one-year high at 1.2679 before closing again around the mid-1.2620s. USD/JPY briefly dipped below 134 after a narrowing of yield differentials. AUD hit a 10-week high at 0.6818 before closing below 0.68. USD/CAD printed a “doji” as it rangetraded.

Stocks: US equities ended a mixed bag. The blue-chip S&P 500 added 0.45%. The tech-heavy Nasdaq 100 gained 1.11%. The Dow closed down by 0.09%. Investors fled to tech after the slightly milder CPI report. It wasn’t a full blown “risk on” session. More simply, value vs growth rotation. That means rate and yield sensitive tech outperformed value sectors like banks, energy, and industrials. Excitement from Google’s AI event helped lift sentiment as well. Alphabet surged 4.02% and Amazon 3.35%.

Asian stocks traded mixed after the whipsaw in Wall Street in the absence of any hawkish CPI surprise. The Nikkei 225 was indecisive with one eye on earnings. The Hang Seng was choppy. Chinese inflation for April supported the idea of an economic rebound as prices grew at the slowest pace since early 2021.  That raises expectations for a rate cut in China soon.

US equity futures are pointing to a higher open (+0.2%).  European equity futures are indicating a slightly better open (+0.2%). The cash markets closed down 0.4%.

Gold whipsawed after the CPI data. It jumped to $2048 which is resistance from mid-April. But the metal quickly fell back to close at $2034. Support remains around $2000, resistance reinforced at $2048.

Data Breakdown – Softening trend in annual US CPI

The all-important US inflation gave hope to those wanting the Fed to finally pause their most aggressive rate hike cycle in living memory. Headline y/y US inflation number fell below 5% for the first time in two years. Some of the internals were also positive with rents falling and the supercore figure, which excludes food, energy, shelter and used cars, dropping to 1.9% y/y. This was its lowest since the ramp up in inflation in 2021.

But the monthly readings in both the headline and core were still sticky and high at 0.4%. This is more than double the 0.17% which economists reckon is needed over time to bring price pressures back down to the Fed’s target of 2%. Markets reacted quite sharply consolidating rate cut bets. There are now three 25bps rate cuts priced in for the second half of the year.  We note there is another CPI report the day before the next FOMC meeting in June. Of course, a Fed pause is not the same as a Fed pivot. The other half of the FOMC’s mandate – full employment – is still very solid.

Chart of the Day – GBP hits new heights

The US inflation data saw cable make fresh one-year highs. Focus now turns to today’s BoE meeting to see if Bailey backs up market pricing of more hikes after the nailed on 25bp move today. It may be a struggle. UK inflation remains way too high but is expected to fall quite sharply as food and energy pressures fade. The economy has also remained resilient with wage growth and the services sector strong.

Forward guidance and updated growth and inflation projections will be key for sterling direction. We will probably hear about data dependency and see a split in the MPC. GBP/USD May 2022 highs at 1.2659/66 will be initial resistance. The 100-week SMA sits above at 1.2708. This week’s low and the late April top at 1.2577/83 should offer support.