US treasuries continued to move lower yesterday after US CPI for January came in unchanged at 2.1% missing expectations of a fall to 1.9%. The unexpectedly firmer than expected reading saw US yields climb across the curve, as 2, 5, 7 and 10 year yields all rose in unison with the 10 year climbing above 2.9% and above the levels that prompted the sharp selloff in stock markets seen in the past couple of weeks.
The US dollar initially kicked higher on the report, while stocks ratcheted lower, however the effect was short lived as equity markets subsequently recovered while the US dollar fell back sharply, in a somewhat counterintuitive reaction to the prospect of higher rates in the months ahead.
While yesterday’s inflation numbers make a Fed rate rise in March more or less a done deal the prospect of additional rate rises later on in the year don’t appear to be causing the same consternation in equity markets that they were a week ago, as US markets closed higher for the fourth day in succession, despite initially opening lower in the wake of the release of the data.
This is despite Cleveland Fed economists projecting that core CPI could rise to 2.8%, with headline prices rising to 3.4% in this first quarter. One concern around yesterday’s numbers was the disappointing retail sales numbers for January which missed expectations but which also saw the December numbers revised down.
Could this be a case of higher inflation squeezing down on consumer spending, which suggests that the US economy may not be as in good a shape as originally thought? If this pattern of weak consumer spending were to be sustained then it’s unlikely the Fed would be as aggressive on a tightening cycle than if the spending numbers were good, which may well help explain why the US dollar sold off and stock markets closed higher.
The recovery in yields is helping underpin banking stocks which helped drive yesterday’s gains, along with a rise in commodity prices as oil prices rebounded strongly from two month lows on a lower than expected rise in US stockpiles.
The weakness of the US dollar particularly against the Japanese yen could start to become a problem for the Nikkei 225 which while finding some support above its 200 day MA, will need for the current rebound in global stock markets to continue if it isn’t to succumb to the drag a strong yen could put on its progress.
Yesterday’s rebound in US markets is nonetheless good news for European markets this morning as, the recovery seen yesterday after Tuesday’s brief setback looks set to continue with a positive open.
EURUSD – appears to be gearing up for another crack at the 1.2500 level after moving back through the 1.2400 level yesterday, with the 1.2600 area the larger resistance level. Support remains back at the 1.2330 level, and below that at the 1.2160 area.
GBPUSD – the pound continues to remain resilient pushing back through the 1.3970 area, which raises the prospect of a move back towards the 1.4200 level, on a break above the 1.4030 area. Pullbacks are likely to find support at the 1.3920 area, and 1.3820.
EURGBP – feels like it wants to move higher but can’t crack the 0.8910 level, making it susceptible to pullbacks toward the lows this week near 0.8840. The 0.8930 level is the high for this year and is likely to be a tough nut to crack.
USDJPY – took out the 2017 lows at 107.30 yesterday, pushing down to 106.73 and opening up the prospect of a move towards the 105.00 area initially. We need to recover back above the 107.30 level to open a squeeze back to 108.00.
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