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Equity Markets Rally, Commodities Surge as US Inflation Slows

Published 05/16/2024, 02:25 AM
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All’s well that ends well. US inflation came in line with expectations yesterday; core CPI fell for the first time in six months and the monthly CPI figure was a bit lower than expected. Cherry on top, retail sales stagnated in April and came to cement the idea that the US economy could be finally slowing along with the first insight from Home Depot (NYSE:HD), earlier this week, that missed revenue expectations and warned of slowing consumer demand due to the high-rate environment. Other big US retailers will be revealing their results in the coming hours and days, and they might reinforce the slowing demand narrative.

The combination of slowing growth and softer inflation is a godsend for equity markets who needed this boost; there is nothing more appetizing for investors than the smell of lower future rates.

The US 2-year yield retreated to 4.70% to reflect this 50bp cut expectation, activity on Federal Reserve (Fed) funds futures now give around 75% chance for the first cut to arrive in September, regardless of the fact that September could be a politically sensitive month for the Fed to start cutting the rates.

The S&P 500, Nasdaq 100 and the Dow Jones, all renewed record yesterday. Across the Atlantic Ocean, the sky was as sunny – at least in the market – the Stoxx 600 and the FTSE 100 renewed record, and the Swiss SMI reached the highest levels in two years. What a blast!

In the FX markets, not seeing a 4th straight month of hotter inflation sent the US Dollar Index tumbling to below its 200-DMA. The dollar index slipped below the major 38.2% retracement on YTD rally and has officially stepped into the bearish consolidation zone. Even though the latest inflation numbers prove to be far from the Fed’s 2% policy target especially considering the slowing pace of easing, the possibility that the acceleration in the first three months of the year could be temporary keeps the Fed doves in a sweet spot for a while. I revise my USD outlook to neutral-bearish for the weeks to come.

But…

The EUR/USD is flirting with the 1.09 level this morning, and is now comfortably above its own 38.2% Fibonacci retracement on YTD decline, and could extend gains to 1.0930. Clearing the 1.10 resistance will take more than just a sigh of relief. The European Central Bank (ECB) is preparing to cut rates in June – before the Fed, the Fed members continue to call for patience until they are convinced that inflation is on a solid path toward the 2% target and despite yesterday’s satisfactory inflation read, that’s not the case for now. So the fact that the ECB is still one step further in its ambition to ease policy will likely keep the euro’s upside potential capped.

Cable is set to retest the 1.28 peak of the start of the year, but here as well, the dovish shift in Bank of England (BoE) expectations may not allow a rise above the 1.28 mark.

Elsewhere, the softer dollar lifts some of the burdens off the USD/JPY, especially after the latest GDP data – released today - warned that growth in Japan shrank more than expected in Q1 and lowered the chances of seeing the Bank of Japan (BoJ) normalize its policy soon. Happily for the BoJ, the USD dollar is being sold across the board, otherwise, we would’ve seen another spike in the USD/JPY. The trend and momentum indicators remain supportive of a further decline and the downside correction could continue toward the 152.85 without the need to change the narrative. But the BoJ’s reluctance to act could make a move below this 152.85 level complicated. The USD/CHF, on the other hand, could see its rally slowdown, but a slower depreciation of the Swiss franc is not bad for inflation in Switzerland and will allow the SNB to continue cutting the rates later this year. Therefore, the USD/CHF outlook remains positive, regardless. Support is seen near the 0.90 level.

In metals and commodities, gold bulls eye a fresh record on the back of softening US yields and a broadly softer US dollar. The barrel of US crude rebounds above the 100-DMA after tipping a toe below the $77pb level yesterday. Yesterday’s satisfactory US inflation data keeps the perspective of major central bank rate cuts wide-open and supports the continuation of the reflation trade. In this reflation context, US crude could reclaim an advance to $80pb.

Copper futures hit record highs, also boosted by the growing demand from EV makers and data centers. The latter could help Anglo American cement and extend gains after they rejected BHP’s second offer this week and announced to exit their diamond, platinum and coal mining to focus on copper and iron ore.

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