Markets jump on soft CPI but Fed needs more time for cuts

Headlines

* Fed holds rates steady, indicates only one cut coming this year

* Nasdaq, S&P 500 hit new all-time highs after softer US CPI

* UK economy crawls into Q2 but promises better times ahead

* Gold pops higher before giving back some gains on modestly hawkish FOMC

FX: USD initially tumbled after cool CPI. It hit a major Fib level at 104.26 before paring losses on the Fed median dot plot for 2024 showing jus tone rate cut from the predicted two and three in the prior plot in March. The Fed’s statement was left broadly unchanged while Powell’s press conference added little new. The Fed are data dependent and not yet confident to cut rates. But yields were lower with 45bps now priced in for 2024, more than 37bps at the start of the day.

EUR rose to a high on the day of 1.0852 after the softer US CPI data. But sellers stepped in during the FOMC statement and Powell’s press conference. Focus in Europe remains on France and wider French versus German government bond yield spreads. We are very close to the top of the range in this differential. Wider spreads will weigh on EUR.

GBP popped up to levels last seen in mid-March at 1.2860. Cable then closed back in the recent range just below 1.28. UK monthly GDP was flat against estimates of a 0.1% fall. Weather may have been a factor with retail soft, but the services sector rose.

USD/JPY pulled back much of the losses seen after the US inflation data. Prices had dipped below 156 but settled at 156.77. The 10-year US Treasury yield slipped to lows seen in April before rebounding back to its 200-day SMA at 4.32%.

AUD advanced just above 0.67 before following all the other majors and giving way to some dollar buying. Eyes are on the jobs data. CAD got to 1.3679 before bouncing back above 1.3720. Firmer risk appetite helped initially but the major’s big driver should remain rate differentials.

US Stocks: Wall Street’s main indices posted more record highs.  The S&P 500 finished up 0.85% at 5,421. The Nasdaq 100 settled higher by 1.33% at 19,465. The Dow closed flat at 38,712. Tech was easily the biggest gainer (+2.46%) with consumer staples (-1%) and utilities the main laggards. Apple spiked higher to $220.20 briefly dethroning Microsoft as the world’s most valuable, before settling 2.9% higher. Oracle jumped over 13% after it forecast double-digit revenue in fiscal 2025.

Asian Stocks: APAC futures are positive. Asian stocks were muted after the mixed handover from Wall Street. Miners and defensive sectors led the falls on the ASX 200. The Nikkei 225 moved beneath 39k as markets digested better than expected PPI data. China stocks were varied with caution over the mixed China inflation data with cooler CPI and narrower factory gate deflation.

Gold made a sharp move higher after the CPI data. But the modestly more cautious Fed and Powell saw gains given up. Prices got near the Fib level at $2343 before falling.

Day Ahead – Australia Jobs

Consensus sees May adding 25,000 jobs, after the better-than-expected print of 38,500 in April. The unemployment rate is predicted to print at 4%, down one-tenth from the prior 4.1%. Economists say shifting seasonal patterns were in play last time which means more people than usual are not employed during school holidays. But they have jobs lined up for the next month.

Chart of the day  – AUD still choppy

AUD/USD has been more or less bouncing off near-term support around 0.66. But prices haven’t been able to move decisively above 0.67. The RBA is still certainly in play as sticky inflation means the bank will struggle to justify policy easing in 2024. Indeed, the chance of a hike from rate setters is still on the table.

CPI rose 0.7% m/m in April and a tenth higher to 3.6% y/y. There are some now even questioning if the RBA hiked rates enough at 4.35%? That is 100bps lower than the Fed, though US CPI did hit peaks above 9%. Higher inflation most probably means higher rates for longer so should underpin AUD.