Apple surges on AI features, eyes on “Super Wednesday”

Headlines

* Dollar hits four-week highs before today’s inflation report

* Nasdaq, S&P 500 hit fresh record highs ahead of risk events

* The Fed and the folly of the 2% inflation target

* Gold edges up as investors eye Fed outlook, US CPI data

FX: USD made marginal gains but hasstruggled to build on its bullish momentum since Friday and NFP.  Resistance is seen at a minor Fib level at 105.25. Markets obviously await both US CPI data and the FOMC meeting.

EUR dipped to a fresh five-week low at 1.0719 before paring losses. Firm support lies in the 1.0675/1.0725 support zone. Focus remains on France and the upcoming election. A “grand coalition” may emerge to prevent the far-right from gaining power. But uncertainty is high which means a soft undertone for the euro. Support sits at 1.0721 which is the 61.8% retrace of the April/May rally. 1.0650/75 is the next support zone. Resistance is 1.0775/80.

GBP made modest gains after a mixed jobs report. Earnings rose above estimates. While ex-bonuses held at a lofty 6%. But other figures were softer even though some of the data has been unreliable. Support sits around 1.27 with resistance just above 1.28. EUR/GBP hit lows last seen in August 2022. Losses could extend to a major swing low at 0.8339.

USD/JPY was again little changed, hovering around 157. Resistance is 157.67/71. The 10-year Treasury yield slid back to the 4.40% level. That is the 50% mark of the Q4 2023 sell-off. All eyes are on “Super Wednesday”.

AUD lagged on soft Chinese stocks early in the session. The midpoint of the December/April sell-off resides at 0.6616. CAD popped up to 1.3791 before settling modestly lower on the day. Wider yields spreads with the US are the real headwind for the loonie.

US Stocks: Wall Street’s main indices ended mixed ahead of CPI and Fed.  The S&P 500 finished up 0.27% at 5,375. The Nasdaq 100 settled higher by 0.71% at 19,210. The Dow closed in the red, down 0.31% at 38,747. Tech was easily the biggest gainer (+1.66%) with utilities (-0.64%) and industrials (-0.54%) the main laggards. Apple soared over 7.2%, adding $215bn and leading the S&P 500 for the first time in years. It was its biggest single day % gain since 2022 as it closed in on Microsoft as the biggest US company. The new Apple Intelligence AI features are seen as positive and could even result in iPhone revenue growth of about 20% for up to two years.

Asian Stocks: APAC futures are mixed. Asian stocks traded lower after the choppy handover from Wall Street, even though there were new all-time highs. Miners led the falls on the ASX 200. Yen weakness supported gains in the Nikkei 225. China stocks were under pressure from ongoing property sector concerns.

Gold printed a doji in a narrow trading day. Prices traded just above $2300 with strong support at $2277. All eyes are on inflation data and the Fed dot plots.  

Day Ahead – US CPI and FOMC

Market focus will initially be on disinflation progress. April’s softer-than-expected print raised hopes for Fed rate cut. So, the May CPI print will be crucial in confirming this trend. Headline CPI is expected at 3.4% y/y, unchanged from April, and 0.1% m/m, two-tenths lower than in April. Core CPI is estimated at 3.5% y/y versus 3.6% in April and an unchanged 0.3% m/m. That the same print as in April and still high for officials who need to see a reading of 0.17% over a few months to bring CPI back to the 2% target.

The Federal Reserve is expected to keep interest rates unchanged at 5.25-5.50% for the seventh straight time. The dot plot and Chair Powell’s comments will frame market expectations for the coming months.

The median dot for the Fed Funds rate at end-2024 will get the most attention. It is likely to shift hawkish to reflect two or less rate cuts this year from the current three. But the market is front-running (with 35bps currently priced in) so a major hawkish reaction is unlikely. Chair Powell is also expected to still balance the narrative in his press conference. That is likely even though the new summary of economic projections could be modestly revised higher.

Chart of the day  – Dollar reclaims bullsih momentum

Upward revisions to inflation and a “higher for longer” rhetoric will probably mean the 2024 median dot will rise. It will only take one moving higher to shift the median up to two 25bps cuts. That is consensus. But the margin could be as narrow as one vote in favour of two cuts versus one or fewer. Chair Powell will have to navigate a tricky press conference if the economic projections are raised but he bats away any hint of a rate hike, while sticking to a more dovish line.

A September 25bps rate cut is now a coin toss, after being as high as 80% in recent weeks. USD has finished lower on the day after the last four straight FOMC meetings. That has been largely due to Powell’s dovish rhetoric at the press conference. Initial resistance is 105.25, then 105.74. Support is the upward trendline at 104.85 and 104.26.