Technology stocks and the price of gold moved higher as the CPI release yesterday showed the biggest yoy increase in the US CPI since August 2008. The consumer price index rose by 5% year on year terms after a 4.2% rise in April. However, the base effect still has a role here and we should see the year on year number decrease in the coming months. The yield on the US 10-yr Treasury note falling to a three month low at 1.4340% has prompted many commentators and analysts to take a view that this move sums up what the markets think about the latest inflation release: no sustained strong inflation ahead. The Fed was right, just move on, nothing to see here. Certainly, if we look at the reaction in the yields, the dollar and the stocks yesterday’s release didn’t indicate the markets not believing the Fed’s narrative of transitory inflation. The bond market moving higher and thus bringing the yields lower indicates that the investors don’t really believe in high sustained inflation. Lower yields pressured the dollar and supported technology stocks. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The S&P 500 (+0.47%) rallied to an ATH value of 4,239.18. It was helped by a rally in technology stocks while industrials underperformed. The Nasdaq Composite index added 0.78% while the Dow Jones Industrial Average remained almost unchanged closing up by only +0.06%. Russell 2000 lost 0.68%. The strongest S&P 500 sectors were healthcare (+1.71%), real estate (1.02%) and technology (0.74%), while the financials (-1.17%) sector lost the most due to the pressure from lower yields.
The price of gold strengthened after the release with the futures now trading about 0.7% higher than at the time of the inflation report while silver futures have risen about 1.9% since then.Oil futures are down slightly (-0.20%) since the time of the inflation report. Saudi Arabia’s announcement that it pumped 8.544 million barrels per day (vs. their target of 8.482 million barrels) was a likely contributor to the weakness. Increases in the US oil inventory data have caused concerns as gasoline and distillate stockpiles have surged.
The Energy Information Administration (EIA) report on Wednesday showed that gasoline stockpiles in the US increased by 7M barrels in the week ending June 4th while distillate inventories increased by 4.4M barrels. We shouldn’t see this happening in the midst of the US driving season. Expectations for continued economic recovery in Europe, China and the United States have on the other hand support the view that the demand outlook for oil stays positive.
It was our view that a break below the 1.2164 support could take EURUSD down to 1.2142. The US CPI release caused a price swing that practically took the market to our target level as yesterday’s low was only one pip higher. This is where the bulls stepped in and pushed the price back to 20-day SMA (currently at 1.2165). EURUSD is now trading below this SMA and yesterday’s high. Technically the signals in the daily trend are mixed but the continued decline in the Treasury yields suggests the USD should stay weak. If EURUSD can push above yesterday’s high and maintain the momentum, then we could see the 1.2218 resistance level violated. A failure to break out of the downward-pointing trend channel would make our earlier bearish scenario more relevant again. Then a move to the 1.2080 – 1.2103 range (the 50-day SMA and a recent reactionary low) would be more likely.
USDCAD has been moving sideways in a range pretty much since the time we said that the downside potential in the pair is over. This has created opportunities for range traders as the support and resistance levels have been quite well defined. Here are the key support and resistance levels for those looking to take advantage of further reversion to the mean potential in this pair. The support levels: 1.2006 and 1.2056. The resistance levels: 1.2106 and 1.2141. A break beyond the range extremes would mean we should not concentrate on mean reversion trades any longer but look for directional trades.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||The Fed has on several occasions repeated its commitment to ultra-accommodative monetary policy. The rates are likely to stay near zero but now some Fed officials have said that the Fed should start considering potentially tapering their asset purchases.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration has indicated it will seek to deliver another two trillion dollars in infrastructure spending.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower or sideways. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Payrolls||The latest miss in payrolls was the second in a row (+559K vs +645K expected). The unemployment rate decreased from 6.1% to 5.8% but the fact that it happened while the labour force participation rate decreased makes it less good news.|
|Inflation||The year on year headline CPI change was 5% but not all inflation gauges agree with such a high number. The trimmed-mean inflation CPI index published by the Cleveland branch of the Federal Reserve Bank, rose only 2.6% y/y (0.4% m/m).|
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Market News & Facts
- Germany wholesale price index for May +1.7% m/m (+1.1% previous)
- UK April GDP m/m +2.3% (2.4% expected)
- The UK Prime Minister Boris Johnson: A one-month delay to re-opening
- Large Manufacturer conditions in Japan for Q2 -1.4% (+1.6% previous)
- US Senator Warren: crypto regulation is needed.
- PBOC Governor Yi Gang: China’s 2021 consumer inflation less than 2%
- US Republican senators saw some progress in infrastructure talks
- RBA may start to dismantle some of the QE structure soon
- China May CPI came in at 1.3% y/y (1.6% expected)
- China PPI was confirmed at 9.0% y/y (8.5% expected)
- China state media to Australia: Diversify your iron ore exports away from China
- Australia NAB business confidence for May 20 (26 previous)
- Australia NAB business conditions for May 37 (32 previous)
- US report: Virus leak from a Chinese lab in Wuhan is plausible
- Yellen will persist with Biden’s $4tr spending plan even if it increases inflation
- The head of Rosneft: the world will face acute oil shortage in the long-term
- President of El Salvador to make Bitcoin a legal tender
The Next Main Risk Events
- GBP – BOE Gov Bailey’s Speech
- USD – Prelim UoM Consumer Sentiment
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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