Risk-on takes off as US CPI brings relief to Fed

Headlines

* Traders bet on faster Fed interest rate cuts as US inflation falls

* Dollar slides, EUR/USD post fresh five-week peak, USD/JPY sinks below 155

* All three major US stock indices post record closing highs

* Gold climbs close to $2,400 on falling yields and greenback

FX: USD suffered its worst one-day sell-off of the year as it fell to a five-week low. Annual US core CPI was the lowest since 2021. Key monthly core inflation was in line with estimates (0.29%) for the first time this year. The 12-month change (3.6%) was a 3-year low. After three straight months of consecutive upward surprises, the disinflationary process regained some momentum. But one report doesn’t make a trend. Policymakers will likely need more than two months of data to be confident of hitting their 2% target. A 25bps September rate cut is now given a 75% chance, against 66% before the data release.

EUR surged higher for a third day up to a major long-term Fib retracement level (38.2%) of the Q4 rally at 1.0875. The April high is at 1.0885. Better-than-expected industrial production gave the euro more support, aside from the afternoon dollar slump. More ECB comments also backed up a nailed-on June rate cut.

GBP moved higher for a fifth day above 1.2650. BoE rate cut expectations firmed but risk sentiment helped cyclical currencies.

USD/JPY fell sharply, dropping 1% and back below 155. The 10-year JGB yield posted an 11-year high earlier in the week as speculation increased that the BoJ will continue to tighten policy. The 10-year US Treasury yield is highly correlated to the currency major. It broke down 10bps on the day, hitting the 200-day SMA at 4.33% and a swing high from 2022.

AUD jumped 1% and broke through previous resistance just above 0.66. The pair closed above the Fib level of the Q4 sell-off at 0.6676. USD/CAD fell down through support at 1.3623/6. The 200-day SMA is at 1.3566. The Kiwi was the best performing major as Bloomberg reported that China is considering more support for the economy by purchasing millions of unsold homes.

Stocks: US equities hit all-time highs. The broad-based benchmark S&P 500 closed up 1.17% at 5,308. The tech-dominated Nasdaq 100 outperformed, adding 1.49% to finish at a second consecutive record closing high at 18,596. The Dow Jones settled up 0.88% at 39,908. This was the 23^rd record close of 2024 for the S&P500, with the index up 5.4% on the month. Tech led the way with only one sector, consumer discretionary in the red. Nvidia was the S&P500’s biggest index point contributor, rising 3.6%. Meme stocks closed sharply lower with GME down 19%.

Asian Stocks: APAC futures are in the green. Asian stocks traded mostly higher after the record closing high in the Nasdaq. The ASX 200 was helped by mining and materials. The Nikkei 225 closed very marginally higher and off its best levels. Sony grabbed the headlines after jumping over 8% on forecasts of higher annual profit and a pledge to boost shareholder returns. The Shanghai Comp was under pressure after the recent US tariff announcement.

Gold broke higher as the buck and yields tanked. It was the third highest close in history. Copper spiked higher to 15-month highs at $5.12 before closing below $5.

Day Ahead –Japan GDP and Australia Jobs

Expectations are for Q1 Japan GDP to contract 0.4% versus a previous increase of 0.1%, with the quarterly annualised print seen at -1.5% versus the prior 0.4%. Despite avoiding a technical recession with the Q4 revision, the underlying data presented a mixed picture. The modest growth in Q4 was underpinned by strong exports due mainly to a big increase in services exports. But private consumption continued to drag, with a third consecutive quarter of contraction. 

Expectations are for Australia employment in April to have grown by 20,000.  The prior report saw a contraction of 6,600. The jobless rate is forecast to tick one-tenth higher to 3.9%. Both the RBA and the Australian Treasury had predicted the unemployment rate would rise modestly as the effect of 13 rate hikes dampens demand in the economy. 

Chart of the Day – Gold breaking higher

Gold is up nearly 15% so far this year and looks to be making its way to record highs. This comes even though for the last couple of months, markets have back-tracked on the timing of Fed rate cuts. Higher rates are typically bad for bullion as it doesn’t pay out any interest – it is a non-yielding asset. Any protracted delay in policy easing would see the metal struggle, while the investor ETF community is yet to participate in the rally.  

But the Fed is now back in play with the chances of a September rate cut closing above the key 70% mark. Easing inflation is potentially good news for bugs, while central bank buying underpins support. China has been the biggest buyer this year, as central banks posted their strongest start to any year on record. Ongoing geopolitical tensions also offer a bid to the precious metal which is a hedge against uncertainty as a safe haven asset. The all-time high at $2431 is the obvious target for the bulls. Support sits around $2326.