Dollar and stocks continue higher ahead of US CPI

* FOMC Minutes shows officials were divided on whether to cut rates by 50bps in September

* Moderating core US inflation to ease concerns of remerging price pressures

* USD gains, enjoys its strongest levels since mid-August, gold dips

* S&P 500 rises to record as traders shake off October malaise

FX: USD looked to have broken to the upside after two days of bullish consolidation near Friday’s recent top. The buck rose to two-month highs ahead of CPI data. Treasuries similarly pushed higher with the 10-year yield moving away from the psychological 4% level. The FOMC minutes were more hawkish than anticipated with officials more divided over the scale of cut.

EUR broke down and is nearing the 100-day SMA at 1.0932. More ECB officials essentially confirmed another 25bp rate cut next week at its meeting. We have said recently that EZ/US short-term yield spreads have widened in the past few weeks, hurting the single currency. A much stronger US CPI report would likely be needed to continue this trend.

GBP outperformed on the day. But prices moved below the 1.31 level, closing at fresh cycle lows. We could see 1.30 relatively quickly, where there should be decent support.

USD/JPY has pushed up to levels last seen in mid-August around 149.34/39. Next targets above here include the 100-day and 200-day SMAs around 151.12/34. Rising US Treasury yields contrast with any mixed, less hawkish messages from Japan.

AUD sold off for a fifth day as it nears the 100-day SMA at 0.6689. The NZD underperformed after the RBNZ cut its cash rate 50bps to 4.75%, as expected. Markets priced in another 50bps cut for the late November policy decision.  USD/CAD surged through the 100-day SMA at 1.3651 and the halfway point of the August/September decline at 1.3691. Oil dipped sharply before paring losses and closing around 1% lower.

US Stocks moved to new record intraday and closing highs in the benchmark S&P 500. A fresh all-time closing high was seen in the Dow. The S&P 500 closed 0.71% higher to settle at 5,792. The tech-heavy Nasdaq 100 gained 0.80% to finish at 20,268. The Dow led gains and settled up 1.03% at 42,512. Health, tech and industrials led the winners with only utilities and communication services in the red. Google weighed on that latter sector, as it slid over 1.5%. US regulators are weighing a breakup of the tech giant as a remedy for its monopoly case. Boeing dropped 3.4%, the steepest decline on the Dow, as it confirmed it withdrew its latest pay offer to striking workers.

Asian stocks: Futures are mixed. Asian stocks also traded mixed again with the tech-led Stateside overnight moves overshadowed by the China rout.  The ASX 200 saw losses in the commodity sector beaten by gains in tech and telecoms. The Nikkei 225 moved above 39,000 even with few clear-cut drivers.  The Hang Seng and Shanghai Composite were mixed with the Hang Seng marginally helped by reports of a briefing on fiscal policy to be held on Saturday.

Gold was down for a sixth straight session. But prices backed off three-week lows as prices traded around the 21-day SMA at $2618. The haven risk premium might be unwinding a touch, with focus on improved US data and a more moderate Fed easing cycle.

Day Ahead – US CPI

Consensus looks for headline US consumer prices to rise +0.1% m/m in September, down one-tenth from the prior month, while the annual print is forecast at 2.3%, from 2.5% in August. The core rate, which excludes volatile food and energy components, is expected to increase at +0.2% m/m, one-tenth below the August figure, with the annual rate unchanged at 3.2%.

Inflation concerns are placed more on rents and prices for services. Rents impact the inflation data with a lag, but the expected slowing is taking longer than anticipated. The owners’ equivalent rent (OER) contribution in August was another upside surprise, and the latest drop in mortgage rates could again spark upside housing and rent costs. In addition, the latest NFP report saw wage gains back to 4%. That seems too high for rents and CPI in general to meet the Fed’s objectives. After a summer scare, the job market appears to be getting tighter again, with unemployment falling and the headline figure averaging 186k per month over the past three months.

Chart of the Day – Dollar upside continues

The revised Fed outlook has given USD a decent 2.7%+ boost since the lows in September.  Today, an inline CPI report is likely to confirm current market pricing of two 25bps rate cuts at the Fed’s next meetings in November and December. Readings of around 0.2% m/m (0.17% to be exact) are needed to keep the annual rate tracking towards the 2% y/y target. That shouldn’t move the dollar too much as it will reinforce policymakers’ confidence that the disinflation process is intact. It would likely keep the focus on upcoming labour market data and other activity indicators, which are next released in a few weeks.

A hotter than expected report, say a 0.3% core m/m print, may boost the greenback and see it continue its impressive rebound from long-term support around 100.61 on index. The midpoint of the April to September dollar sell-off sits above at 103.33, along with the 100-day simple moving average at 103.29. On the flipside, softer data is needed to see a stop to the buying. The major retracement Fibonacci level (38.2%) of that move is at 102.58.

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