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Stocks up, USD and yields down as Powell leans dovish

Vantage Updated Updated Tue, 2024 July 2 10:07

Headlines

* Fed’s Powell welcomes recent inflation data, but needs more confidence to cut

* Stubborn eurozone core inflation endangers pace of policy easing

* USD and yields dip on Powell comments which offset upbeat jobs data

* S&P 500 and Nasdaq 100 hit record closing highs, Tesla gains

FX: USD sold off modestly on dovish-leaning comments from Fed Chair Powell. He said the disinflation trend shows signs of resuming and the FOMC have made quite a bit progress on inflation. Yields moved lower with the odds of a September rate cut now around 67%. The JOLTS data was consistent with ongoing moderation in the labour market, but did not signal major weakness.

EUR dipped to 1.0709 before stronger than expected core inflation saw buyers step in. Sticky services inflation remained at 4.1% with wage growth still stubbornly high. The strong jobs market was confirmed today with unemployment stuck at a record low of 6.4%. There was mixed ECBspeak. Resistance is at 1.0776/78 with the focus on the ECB’s annual conference at Sintra.

GBP found support at recent lows at 1.2612/15 and bounced above the 50-day SMA at 1.2660. Eyes are on the UK general election on Thursday, though it is not expected to be a major market mover for sterling or UK assets.

USD/JPY made a fresh multi-decade high at 161.74 before closing very marginally lower. There is obvious attention on intervention noise out of Tokyo. Many watchers are citing 165 as the next “line in the sand”, with price action not hugely volatile as yet.

AUD remains relatively contained with initial resistance at 0.6676. The RBA kept a rate hike on the table according to the latest Board minutes. The case for holding rates steady was stronger but they are not ruling anything out. Retail sales are released today, with expectations slightly improved though the three-month trend remains weak. CAD continued to trade around the 50-day SMA at 1.3685 with the loonie leading the G10 pack.

US Stocks: Equity indices made solid gains with tech slightly outperforming. That saw record high closes in the benchmark S&P 500. It added 0.62% to finish at 5,509. The Nasdaq 100 settled up 1.01% at 20,012 and also a record close. The Dow finished higher by 0.41% at 39,332. All sectors were in the green apart from energy and healthcare. Tesla grabbed the headlines, finishing up over 10%. It reported consensus-beating second quarter deliveries of 444k versus 439k.

Asian stock futures are in the green. Asian stocks were mixed on soft US data and rising bond yields. The ASX 200 struggled with weakness in real estate and miners.  The Nikkei 225 reclaimed 40,000 for the first time since early April. The Hang Seng closed near 18,000 after its long weekend. The Shanghai Composite was rangebound trying to get back above 3,000.

Gold had another quiet day, trading in a very narrow range for a third straight day. Prices are tracking sideways under the 50-day SMA at $2337.

Day Ahead – ISM Services and Fed Minutes

The ISM services measure is expected to fall to 52.0 from 53.8. S&P Global’s PMI data showed the US economy gaining further positive momentum in June, with growth the fastest in services for over two years. Markets are always interested in the forward-looking ISM survey data, though it has been volatile in recent months, so caution in interpreting any signals could the order of the day.

We also get the FOMC minutes later on. After Powell spoke yesterday at Sintra with a mild dovish bias, those latest thoughts may ultimately defuse the impact of the minutes. That said, the June Fed meeting was relatively hawkish given the new median Dot Plot showed just one rate cut expected this year. That contrasts with markets expectations then and now too, of two rate reductions.

Chart of the day  – Tesla soars into overbought territory

Tesla beat consensus estimates for second quarter deliveries and sparked a buying spree/short squeeze. The stock hit a 16-month low in April at $146.22. Prices jumped in a few days up to near $200, before trading around $180 for most of May and June with support from the 50-day SMA. The EV-maker then saw an upside breakout in late June with prices breaking a number of Fib levels and recently the 200-day SMA at $205.70.

We are now in overbought territory on several momentum indicators with the daily RSI above 80. The near-term retracement levels sit at $216.87 for support and $238.10 as initial resistance. We note Tesla ranks as the fourth most shorted stock in the US with an increase in this positioning since the start of June. One of those shorts is apparently held by Bill Gates, though he has never officially confirmed this.