Stocks jump on softer than expected CPI, Dollar rebounds

* Israel and Hamas reach ceasefire deal to end 15-month Gaza war

* Stocks surge as CPI slowdown lifts Fed rate cut hopes

* JP Morgan, Goldman, Citigroup rake in record hauls as Biden era ends

* Gilt yields fall after UK inflation lifts sterling mildly

FX: USD dropped sharply on softer US core inflation numbers of 0.23% m/m and 3.2% y/y, both one tenth below estimates. But buyers stepped in mid-US session after prices had fallen to an intraday low at 108.60. The headline bounced to 0.4% m/m which was one-tenth above consensus and 2.9% y/y. Rents picked up but were generally softer than earlier increases. Key services prices slowed to a 0.2% pace. Economists now reckon that given the CPI and PPI data, core PCE is likely to print between 0.16% and 0.19% m/m. The US 10-year Treasury yield sunk below the 2024 top at 4.73% as two rate cuts for 2025 were again priced in.

EUR gave up most of its gains after the US inflation data. The major got to 1.0354 and the 21-day SMA. ECB doves were out on the wires saying it made sense to cut rates to 2% by mid-year. Prices need to get above 1.0448 to stop the long-term downtrend. Long-term support sits around 1.02.

GBP rose to long-term support/resistance at 1.2299 before retracing. UK CPI came in softer than expected with all-important services inflation sliding to 4.4% from the expected 4.9% and prior 5%. That is the slowest print since March 2022 and below the MPC’s forecast of 4.7%. Going forward, we could see increases in the minimum wage and higher energy and food costs. But crucially, gilt yields fell, and sterling held some of its gains as markets breathed a big sigh of relief. A February rate cut is close to being fully priced in.

USD/JPY fell as the yen outperformed. Comments from BoJ Governor Ueda boosted rate hike bets. There are now around 18bps priced into the late January BoJ meeting. The falling yield on the US Treasury 10-year also pushed the major lower.

AUD poked out of the top of the long-term bear channel but closed below, though above 0.62. A decisive break higher needs to get above resistance around 0.63. USD/CAD dipped before remaining in the recent trading range. The loonie lagged its commodity dollar peers.

US stocks: Major US stock indices rose strongly on the back of Fed rate cuts being put back on the table. The S&P 500 finished 1.83% higher at 5,949. The tech-dominated Nasdaq closed 2.31% higher at 21,273. The Dow settled 1.65% higher at 43,221, up over 700 points. Tech outperformed with markets very whippy at present. Prices are currently printing a doji monthly candlestick. That means they are in the middle of the relatively narrow range in January. Robust earnings from major banks fuelled the rally, along with softer CPI. Citi, Wells Fargo and Goldman Sachs all soared more than 6%. Falling bond yields saw a couple of 25bps Fed rate cuts back in play for this year.

Asian stocks: Futures are in the green. Indices were choppy with mixed performance on Wall Street. The Nikkei 225 faded as markets digested the more hawkish hint by the BoJ’s Ueda. The ASX 200 saw financial and consumer stocks gains undermined by tech losses. China traded soft with ongoing trade frictions.

Gold picked up and closed around last week’s top at $2,697. There is solid resistance above here around $2720, but long-term charts do look like there could be a bullish breakout developing. Near-term, bullion has been relatively quiet recently as it awaits the next big driver.

Day Ahead – Australia Jobs, UK GDP and US Retail Sales

The December Australia jobs print is forecast to show 10k positions added and the unemployment rate rising one-tenth to 4%. The labour market remains relatively tight and is probably the key risk for the RBA remaining on hold. But after the softer than expected annual trimmed mean CPI figure, markets expect the central bank to start cutting rates in mid-February at its first meeting of the new year.

UK November growth is forecast to print at 0.2%. This comes after -0.1% in October. An inline print would mean q/q growth likely exceeds the BoE’s prediction of flat growth. There are some downside risks due to weather and storm disruptions, which may have hit footfall and activity.

Finally, US retail sales are expected to rise +0.5% m/m in December, just below the previous +0.7%. The ex-autos measure is seen rising +0.4% m/m, two-tenths above the November print. Recent consumer credit numbers were soft, but firmer car sales should offset that weakness.

Chart of the Day – USD/JPY trying to breakdown

The major tried to fall out of the recent 156-158 trading range. Yen strength came on the back of BoJ Governor Ueda who said that the bank will make a decision over whether to raise rates next week. He also flagged the strong US economy and the momentum toward spring wage negotiations. Yesterday came similar remarks from Deputy Governor Himino – not ruling out a rate hike in January. We had last week’s rumours about upward revision to inflation forecasts in the new quarterly projections (linked to surge in cost of rice and weaker yen). All-in, they are big signals about the upcoming BoJ rate decision.  

The market implied probability of a 25bps rate hike has increased from 60% to 77%. A strong break down through 156 could see 154 fairly quickly. The topside level to beat is 158.87 from last Friday after NFP. It goes without saying that is in prime intervention territory.

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