US stock rotation continues, eyes on UK and NZ CPI

Headlines

* Traders see the odds of a Fed rate cut by September at 100%

* 10-year US Treasury yields edges lower following Powell commentary

* Gold jumps to record high above $2460 on Fed rate cut hopes

* US stocks saw broad-based gains, but tech underperformed

FX: USD closed near its lows after initially moving above its 200-day SMA. The flat session saw strong retail sales, but gains were given up through the session. The control figure also beat estimates and likely should have a positive impact on Q2 GDP.

EUR closed little changed. The German ZEW business survey fell modestly more than expected probably reflecting the uncertain French political climate and a potentially slower pace of ECB rate cuts. Gains have stalled around 1.09 but this could just be bullish consolidation.

GBP hovered just below recent one-year highs. It’s a big data week with incoming CPI and then tomorrow’s wage growth figures and Friday’s retail sales.

USD/JPY is trading just above the 50-day SMA at 157.90. This indicator has offered decent support at various times this year. The US 10-year yield fell to fresh lows last seen in March. Bloomberg estimates Japanese authorities spent $13.5 billion intervening in the FX market to support the yen last Friday.

AUD dropped quite sharply to a low of 0.6714 before closing at 0.6733. The kiwi made fresh monthly lows, with the antipodeans still suffering after Monday’s weak China data . USD/CAD moved higher to 1.3707 before paring gains. Canada CPI came in weaker than expectations. That means the market baked in the odds of a back-to-back rate cut by the BoC next week.

US Stocks: US markets closed mostly in the green with huge rotation again between megacaps and small caps. The benchmark S&P 500 closed at a fresh record high at 5,667, 0.64% higher. The tech laden Nasdaq 100 finished flat at 20,399. The Dow Jones broke sharply higher, closing at an all-time high, up 1.85% at 40,954.

Rotational pressure continues with small caps beating big caps, growth moving into cyclicals and low momentum over high momentum. The Russell 2000 soared 3.5%, posting its fifth straight day of gains of more than 1%, its longest win streak since April 2020. The current period is the largest five-day outperformance of small caps over the S&P 500 since October 1987. Part of the “Trump” trade also goes on with bitcoin rallying strongly as well as infrastructure. In contrast, megacap growth stocks led by Nvidia, Microsoft, Meta were in the red.

Asian stock futures are mixed. Asian stocks were mixed on Tuesday after choppy price action on Wall Street.  The ASX 200 traded modestly lower with mining stocks lower on Rio Tinto’s update. The Nikkei 225 gained after its holiday weekend and a softer yen. The Hang Seng and Shanghai Composite were subdued with the former gapping lower below the psychological 18,000 level.

Gold made record highs as we said it probably would yesterday. Prices broke through the previous top at $2450 to a new peak at $2469. Yields moved lower while the dollar was steady. This is now the fourth straight week of gains.

Day Ahead – New Zealand and UK CPI

Q2 New Zealand inflation is seen rising 0.6% q/q, which equates to a cooler annual figure of 3.5%, from the prior 4%. The latest RBNZ estimates see 0.6% q/q and 3.6% y/y. Domestic price pressures and services inflation are proving sticky which means there could be upside risks for non-tradeable inflation, which is the key determinant for monetary policy. The RBNZ recently turned modestly dovish with now roughly a 57% chance of an August rate cut.

Expectations are for both the headline and core UK CPI to hold steady, unchanged from their May prints. The former grabbed all the headlines too as it saw CPI return to the BoE’s 2% target for the first time since July 2021. The core rate, which strips out volatile food and energy costs, also pulled back, to 3.5% in May from 3.9%. The most important measure for the Bank of England and rate setters is services inflation. This is expected to tick one-tenth lower to 5.6%, having slipped from 5.9% in the previous report. This is still well above the MPC’s projection of 5.1%.

Chart of the day – GBP/USD consolidating but overbought

Cable has been on the charge after it broke through resistance above 1.28 last week. The new Labour government’s steady hand including a reset of relations with the EU has underpinned support for sterling. Markets also reduced the odds of an August rate cut after more hawkish speeches from BoE officials last week. There’s now around a 52% chance of an August rate reduction, down from above 60% before their comments, and roughly 48bps of total easing seen in 2024. There are no BoE speakers scheduled before the 1 August meeting and this is the last week of key data points.

Bulls have recently taken GBP/USD near to 1.30 which is a one-year high. But prices are overbought which gives a warning that cooler CPI and other UK data could see some selling. The March top is 1.2893. Of course, the flip side and stronger data would likely push cable higher beyond 1.30. It might also pull EUR/GBP closer to long-term lows around 0.8339.