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Markets take a breather ahead of inflation data

Vantage Updated Updated Wed, 2023 November 29 09:54

Headlines

* OEPC+ mulls new oil production cuts amid Middle East conflict

* US GDP enjoyed an upward revision to 5.2% in Q3 from the original 4.9%

* German inflation sinks more than expected as energy retreats

* 10-year Treasury yield falls below 4.3% for first time since September

FX: USD rose from a three and a half month low after GDP revisions showed the US economy grew faster in the third quarter. The greenback still remained on track to post its worst month of 2023.  Bets on a 25bp March Fed rate cut jumped near to 50% from 35% a day before. The DXY has bounced off a major Fib level (61.8%) of the summer rally at 102.54. The midpoint of that move sits above at 103.46, together with the 200-day SMA at 103.59.

EUR fell for the first day since Thursday last week as German CPI disappointed. State inflation data all came in well below estimates which points to downside in today’s euro area figures. Initial support for the major is 1.0955/65.

GBP popped up to a high at 1.2733 before printing a doji candle. This comes after a strong surge higher to the next major retracement level at 1.2720. Mortgage approvals rose more than expected but the data flow has been very light this week.

USD/JPY dropped to a 10-week low at 146.67 before settling only marginally lower above 147. The next support point is a minor long-term Fib level at 146.08.

AUD struggled after making a new high at 0.6676. the 200-day SMA sits at 0.6580. The NZD spiked higher above 0.62 after the hawkish message from the RBNZ. But the candle looks potentially bearish as prices settled only marginally higher at 0.6155. The bank raised its forecast profile by 40-50bps over the next three years. This bucked the global dovish trend of central banks.

Stocks: US equities were choppy again and closed mixed. But November has been a banner month with the S&P 500 on track to record its biggest monthly % gain since July 2022. The benchmark index lost 0.09% to settle at 4550. The tech-laden Nasdaq 100 finished 0.14% lower at 15,987. The Dow edged 0.04% up to close at 35,430. Real estate led the gains with financials. General Motors stock surged over 9% after it announced a $10 billion share buyback and 335 dividend boost.

Asian futures are in the green. APAC stocks traded mixed again on Wednesday as US Treasuries rallied, and the dollar dipped. Investors digested the RBNZ’s hawkish hold as it kept rates unchanged but pointed to the risks of a rate hike. The AX 200 was in the green helped by softer monthly CPI which seals a pause at next week’s RBA meeting.

Gold extended to a five-day win streak, after it spiked up to a fresh cycle high at $2052. Treasury yields continued to slide with the 10-year now below 4.30%. Monday’s top was at 4.52% so this is a huge move in just three days. Real yields have also fallen from the high above 2.50% to 2.10%. This has been a major driver of gold prices.

Day Ahead – “Inflation Thursday”

We get two big price reports out later today. A further drop in eurozone inflation is forecast with the headline index of consumer prices in the 20 countries that share the euro set to fall from 2.9% in October to 2.8% in November, which will be closer to the ECB’s 2% target.  The core rate, excluding energy and food, is expected to drop from 4.2% to 4.0%. Lower core inflation is set to be the main driver of lower headline with both goods and services inflation likely to be lower.

The US core PCE data also lands today and is a focus for the FOMC, as it is a broader gauge of prices that dynamically adjusts to changes in the spending basket. The median consensus call is for 0.2% m/m which is what is needed over a protracted period of time to bring CPI back to the fed’s 2% target. Shelter costs have a lower weight in the PCE basket, so their rise in the consumer price basket could bring Thursday’s numbers lower.

Chart of the Day Overbought EUR/USD pulls back

The eurozone inflation data could generate more excitement about how soon rate cuts will start, especially with the eurozone economy likely to have entered a technical recession in Q4. But ECB members have been slightly more hawkish in recent comments as they are still wary of persistently high wage growth. This contrasts modestly with some more dovish recent hints by some Fed officials.

EUR/USD advanced to a three-month high above 1.10 yesterday. Prices are overbought on several momentum indicators. Initial support might be seen at retracement support, the 61.8% Fibonacci of the second half decline, at 1.0961. Below here lies next support around 1.0875/00.