US CPI News: Impact on Markets

The latest US Consumer Price Index (CPI) report revealed a surprising drop in inflation, with the June CPI decreasing by 0.1% month-on-month, marking the first decline in four years. This unexpected dip has fueled speculation that the Federal Reserve may be nearing a point where it can begin cutting interest rates, a sentiment bolstered by dovish comments from Fed officials. The core CPI, which excludes volatile food and energy prices, also came in lower than anticipated at 0.1% month-on-month, further reinforcing the narrative of easing inflationary pressures. As a result, Treasury yields tumbled, with the 10-year yield dropping to 4.20% from 4.28%, reflecting increased market confidence in imminent rate cuts.

The softer CPI data significantly impacted financial markets, particularly the currency and equity sectors. The US dollar weakened across the board, most notably against the yen, which saw a dramatic 1.7% gain, sparking intervention talk from Japanese authorities. Equity markets had a mixed reaction; while the S&P 500 and Nasdaq Composite faced declines due to profit-taking in overvalued tech stocks, smaller companies rallied on hopes of lower borrowing costs. Commodities like gold and oil also reacted positively, with gold prices nearing record highs due to the reduced opportunity cost of holding non-yielding assets in a lower interest rate environment. The market now fully prices in a Fed rate cut in September, shifting focus to upcoming economic indicators to gauge the sustainability of this inflation trajectory.

Japan's FX Market: 

Japanese policymakers have heightened warnings about the yen but remain silent on potential intervention. Finance Minister Kanda noted that FX movements are being driven by speculation, which he believes is inconsistent with fundamentals. Finance Minister Suzuki echoed similar concerns, emphasizing that rapid FX moves are undesirable without confirming any interventions. The Bank of Japan (BOJ) likely conducted rate checks in EUR/JPY on July 12. The Nikkei index dropped from record highs amid chip selloff and yen intervention nerves. Surveys show nearly 90% of Japanese households expect prices to rise within a year. In corporate news, Japan’s SoftBank acquired British AI chipmaker Graphcore, valued at $2.77 billion.

US Economic Indicators: 

The Federal Reserve's Goolsbee indicated the US economy is back on track towards 2% inflation. Fed custody holdings decreased by $6.445 billion, while the June budget deficit shrank to $66 billion due to calendar shifts. A significant drop in monthly US consumer prices was reported, indicating a potential cooling of inflation.

China's Trade Data: 

China’s June trade balance showed a surplus of $99.05 billion, exceeding forecasts. Exports grew by 8.6% year-on-year, surpassing expectations, while imports fell by 2.3%. Despite this, market reaction was muted as conflicting policy goals in China clouded the outlook. Natural disasters in China caused $13 billion in economic losses in the first half of the year.

Currency Markets

USD/JPY: The USD/JPY pair remained volatile, initially dropping to 157.75 before bouncing back to the 159 handle. Speculation about MOF intervention continued, with key levels at 160.00 being watched closely. Technical support was noted around the 55-DMA at 157.57. Large option expiries between 158.80 and 160.60 could contain market action.

EUR/USD: The EUR/USD pair traded steadily in the 1.0863-1.0874 range, supported by positive daily momentum studies and climbing moving averages. With no major EZ data scheduled, focus shifted to US PPI after a soft CPI report. ECB rate decisions next week are also in focus.

GBP/USD: The GBP/USD pair experienced light profit-taking but maintained a constructive outlook, trading between 1.2903-1.2924. The BoE Quarterly Bulletin was a key event, though it was unlikely to surprise the market. Upcoming UK CPI inflation, jobs, and retail sales data will be crucial for sterling.

Commodities

Oil: Oil prices rose amid signs of strong summer demand and easing inflationary pressures in the US. Brent crude futures increased by 0.6%, and WTI crude futures climbed by 0.7%. Despite these gains, Brent was set for a weekly decline.

Gold: Gold prices edged lower but were set for a third straight week of gains, supported by hopes of Fed rate cuts.Gold price is reversing to test the $2,400 threshold early Friday, staging a minor pullback from a new two-month top set at $2,425 on Thursday. Traders now look forward to the US Producer Price Index data and looming risks of more Japanese forex market intervention for the next push higher in Gold price.

Equities

Japan’s Nikkei: The Nikkei index fell 2%, dragged down by tech stocks amid yen intervention concerns. Despite this, Hong Kong’s Hang Seng Index rose 2%, showing regional market resilience.

US Markets: The Nasdaq ended sharply lower, hit by losses in major tech stocks like Nvidia, Apple, and Tesla as investors rotated into smaller companies. The S&P 500 also lost ground, while the Dow Jones Industrial Average managed a slight gain. Treasury yields tumbled, providing a boost for real estate and utility stocks.

Sector Performance

Tech Stocks: The tech sector faced significant pressure as investors rotated into smaller companies. Tesla fell after a delay in the robotaxi launch, and Apple declined despite a price target increase from BofA Global Markets.

Real Estate and Utilities: These sectors outperformed, benefiting from lower bond yields. Real estate investment trusts in the S&P 500 jumped 2.7%, with SBA Communications leading gains.

Airlines: Delta Air Lines and other major airlines slumped after Delta forecast lower-than-expected profits for the current quarter. This was attributed to inflation pinching consumer discretionary spending on air tickets.

Macro Themes and Market Expectations

Fed Rate Cuts: Market sentiment has shifted towards expecting Fed rate cuts, with traders pricing in a 90% chance of a reduction in September. This has been bolstered by softer-than-expected inflation data and dovish remarks from Fed officials.

Japan’s FX Intervention: Speculation remains high about further intervention by Japanese authorities to prop up the yen. This has created volatility in the yen crosses and affected market dynamics.

China’s Economic Policy: Despite positive trade data, the market remains cautious about China’s economic policy direction. The Third Plenum, set to kick off soon, is expected to provide clearer policy signals.

Looking Ahead

Economic Data: Key upcoming data include Germany’s Wholesale Price Index (WPI) and France’s Harmonized Index of Consumer Prices (HICP). US Producer Price Index (PPI) and the University of Michigan’s Consumer Sentiment Index will also be closely watched.

Market Sentiment: With expectations of Fed rate cuts growing, market sentiment remains cautiously optimistic. However, ongoing concerns about global economic growth and geopolitical tensions will continue to influence market movements.

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