Overnight Headlines

*Dollar hovering near 20-year highs, looking to break out after hot inflation

*BoJ official rules out policy tweak to counter weak yen

*ECB members increasingly see rate exceeding zero this year

*Equities drop as stubborn inflation stokes worries on rates, economy

USD was mixed but remains above 104 on the DXY. The greenback fell versus some commodity currencies and safe havens while appreciating against the euro and CHF. The former traded in a tight range again just above 1.05. GBP underperformed and fell to its lowest close in two years. USD/JPY dipped alongside US 10-year Treasury yields and is trading below 130. AUD pared a 1.7% intraday gain and looks weak. USD/CAD is holding above 1.30

US equities reversed earlier gains to finish lower. Cyclical growth stocks again got hammered. The S&P500 gave up a 1% gain to close down 1.7%. The Nasdaq slumped over 3%, below 12,000. It finished at the lowest close since November 2020. The VIX actually ticked lower but is still above 30. Asian markets are in the red this morning. US futures are lower by 0.5%. European futures are sharply off in a negative catch-up with the US session.

Data breakdown – US CPI remains worryingly sticky

Headline US inflation slowed marginally to 8.3% y/y from 8.5% in March. This was a touch higher than analysts’ estimates of 8.1%. The core also held up printing at 6.2% versus 6.5% in March and 6.0% expected. Diving into the detail, there was a moderation in core goods prices which was offset by service sector price rises. Shelter costs, over a third of the index, remain high.

So, have we passed the peak? Most economists think we have. But, and it’s a rather large but, the rate of moderation will be very slow. Energy prices need to go substantially lower, so geopolitical tensions need to improve. Chinese lockdowns are still impacting supply chains. And the NFP report showed wage growth remains above pre-Covid levels as participation remains subdued. This all means increased pressure on the Fed to front-load rate hikes, and more support for the dollar, and more selling in equities.

Chart of the Day – AUD intraday volatility sees further weakness

The aussie has suffered over the past month or so, down over 10% from its highs at the start of April. Commodity prices have eased back while growth concerns in China have severely dented the demand outlook.

Technically, AUD/USD looked bad after printing the April spike high at 0.7661. That was a shooting candle so a trend reversal pattern and bearish. Since then, prices have dropped sharply with the post-FOMC volatility especially notable. Key is the 0.70 support that goes back to August 2015. Yesterday’s rally looked as though buyers were regaining a semblance of control. But that now looks very bearish, and we’ve sold off again this morning. Downside targets include the June 2019 spike low at 0.6744. The midway point of the pandemic low and February 2021 high is 0.6756.