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US CPI in focus, while crypto uncertainty knocks sentiment

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Having come off the back of three days of losses, the US dollar rebounded strongly yesterday as markets absorbed further disappointing earnings numbers, and cryptocurrency exchange Binance backed out of the FTX takeover, due to an $8bn shortfall, prompting a rout in cryptocurrencies in the process.

This jittery market backdrop prompted a sharp sell-off in US markets after Europe had closed, with the Nasdaq 100 leading the losses, snapping a four-day rise for it, as well as the Dow and S&P 500. The late weakness seen in the US looks set to filter into today’s European open, as we look ahead to this afternoon’s US CPI report for October.  

While US headline CPI has been slowly coming down from its summer peaks of 9.1%, the same cannot be said for core prices which have continued to trend higher, and which hit a 40-year high of 6.6% in September. With the latest earnings season well underway it has become apparent that companies are passing on increases in costs to consumers with varying degrees of success, and this trend is now starting to embed itself in underlying core prices, squeezing consumer incomes further.

The September core CPI reading prompted markets to price in the certainty of a 75bps rate hike in November, which has just been delivered, while also potentially pricing in the prospect that we could see a 75bps move in December. Since that September core CPI reading of 6.6%, the discussion has moved on somewhat and the base case is no longer a 75bps move next month, but a more modest 50bps.

Nonetheless Powell’s press conference earlier this month did change the narrative somewhat away from the size of rate hikes, and more towards the duration and final destination of the headline rate. His more hawkish tone suggested that the eventual terminal rate could well be much higher than 4.5% and could be as high as 5%, and which saw US yields soar to their highest levels since 2007, increasing concerns that the Fed was deliberately looking to slow the US economy.

From the tone of this month’s Fed meeting, it seems that the FOMC is still working on the premise of erring on the side of doing too much rather than too little, and if that means stock markets go down so be it. The fact that stock markets have gone up since then suggests that for all the hawkish talk, markets still think that the Fed may have to back off as the economy slows, however today’s CPI report could shatter that narrative if prices don’t start to show signs of softening.

This is why today’s CPI number is so important, although it probably won’t make that much difference in terms of what to expect in December. The prospect of a 50bps move and a step down is more or less baked, and it would take a significant downside miss to even think of a more modest 25bps move.

The real risk is an upside surprise as we look for headline CPI to show further weakness and slip back further from 8.2% to 7.9%. This would also be the fourth successive monthly decline after headline inflation peaked at 9.1% in June, however this isn’t the important number as far as markets are concerned.

Core prices are the main focus and they accelerated in September, pushing up to a 40 year high of 6.6%, and they’ve been sticky all year. Markets will be looking for evidence of a slowdown here if the narrative of slowing inflation is to take hold. The rise in the US dollar does offer cause for optimism, given it acts as a brake on higher prices. Today we’ll find out whether core prices are giving any indication of slowing down.

EUR/USD – has so far failed to crack the 1.0100 area and October peaks. Above 1.0100 we have the September highs of 1.0200. Support comes in at the 50-day SMA at 0.9880.   

GBP/USD – slipped back from just below the 1.1600 area, with the larger resistance at the October peaks at 1.1640, with further resistance at the September peaks at 1.1710. So far, we’ve held above the 50-day SMA at 1.1330, which should act as support. Below 1.1300 opens a move towards 1.1140.  

EUR/GBP – broke above the 0.8780/90 area opening up the prospect of a return to the 0.8860 level. Support comes in at the 0.8690 area.

USD/JPY – rebounded from the 50-day SMA and 145.10 support. We need to see a move back through the 148.20 area to stabilise or risk the prospect of further losses. A break of 145.10 targets the 140.00 area.

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