Headlines

* Stronger than expected UK CPI set to confirm May 25bp BoE rate hike  

* USD regains footing amid higher yields as Fed outlook weighed

* Netflix earnings mixed as password crackdown to expand

* Asia stocks edge lower as Chinese equities drop

FX: USD closed 0.4% lower and below the 102 level. The 2-year US Treasury yield printed a doji candle after it hit 4.23%.The 10-year yield pushed up to 3.62% before closing at 3.57%. Investors are assessing the outlook for the US economy and digesting the latest round of sluggish corporate earnings. Volatility has fallen in recent days.

EUR recovered a lot of Monday’s losses and closed at 1.0971.  GBP added 0.4% to finish higher at 1.2425. The latest inflation data has further cemented the 25bp May rate hike. USD/JPY is consolidating above 134 in range bound trade. The AUD gained 0.4% to settle above 0.67. But it remains below its 200-day SMA at 0.6742. USD/CAD is trading around its 200-day SMA at 134.04 this morning.

Stocks: US equities were muted and ended a mixed bag. The VIX remained below 17. The benchmark S&P 500 was higher by 0.09%. The Nasdaq 100 eked out a gain of 0.03%. The Dow lost 0.03%. Goldman Sachs reported a slowdown in dealmaking while Bank of America said it would cut 4,000 jobs despite strong earnings. Tesla reports after the closing US bell. The stock has fallen more than 40% over the last 12 months. But it has rebounded more than three-quarters of its value this year. A drop in profits is expected as prices were cut. So, margins will be a key focus.

Asian stocks were generally subdued with risk sentiment clouded amid mixed data and company results. The Hang Seng saw losses in auto and tech. Trading was cautious ahead of US Treasury Secretary Yellen’s speech on US-China economic ties on Thursday. The Nikkei 225 dropped after the latest Tankan survey showed manufacturers remained glum.

US equity futures were modestly in the red. After hours, Netflix beat earnings but offered a softer-than-expected forecast and missed on subscriber additions. The shares initially tanked resulting in an initial double-digit % drop. But this was reversed with plans to buy back stock. European equity futures are contained. The cash markets closed +0.6% yesterday.

Gold steadied around $2k as bugs look to build a base ahead of another push towards highs beyond $2,400. Treasury yields did move higher again but the dollar reversed most of its gains from Monday.

Day Ahead – UK Data deluge

Today’s headline UK inflation was forecast to fall into single digits for the first time since August last year. But the headline hit 10.1% in March beating the estimates of 9.8%. The monthly figure was also worryingly strong at 0.8%. This comes after the shock acceleration to 10.4% in February. The core number, which strips out volatile food, energy, tobacco, and alcohol prices, also beat analyst forecasts, rising 6.2% y/y and 0.9% m/m. The BoE is looking at the “persistence” of prices with services inflation a key number for the MPC as it reflects longer-term trends.

After CPI, Friday brings retail sales and PMIs. The former is expected to slow after a solid retail rivalry to kick off the year. The flash survey composite PMI data may slip but remain above the boom/bust 50 mark. These are important data points for the Bank of England rate decision at its meeting in the second week of May. There’s currently near a 90% chance of a 25bps hike, which would take the base rate to 4.5%, the highest since September 2008.  Yesterday’s labour market figures cemented that pricing with strong wage growth confounding economists who thought earnings were moderating.

Chart of the Day – GBP/USD pines for 1.25 again

Sterling hit a multi-month high last week at 1.2546. But disappointingly for the bulls, GBP/USD couldn’t close on a weekly basis above the big, psychological level of 1.25. In fact, the major closed below the previous year-to-date top and resistance at the late January at 1.2447. The bid seen yesterday in cable steadied the major above 1.24 and bulls could be emboldened by the strong CPI this morning.