Weaker US CPI sends US stocks into a tailspin

The September Fed rate cut is a step closer 

The US inflation report for June managed to produce a downside surprise. Despite the headline figure failing to breach the 3% level, the first negative month-on-month change since June 2020 and lower shelter CPI print allowed the market to believe that the Fed is closer than ever to a September rate cut, partly ignoring the fact that there will be another two inflation reports before the September gathering.

This CPI report came one day after Fed Chairman Powell concluded the double testimony in Congress where he kept the cards close to his chest and decided to please Fed members with both hawkish and dovish comments. However, with the clock now counting down to the month-end gathering, the doves will probably push for a dovish stance on July 31.

Fed’s Daly, Musalem and Goolsbee have already expressed their support for rate cuts with the latter describing the CPI report as “excellent”. The calendar today does not feature any planned Fed speakers, but considering yesterday’s print, it won’t be surprising to see some unscheduled appearances from certain Fed doves with a strong urge to comment on the latest data.

Euro/dollar trades higher

Marketwise, the US CPI proved its worth as a key market-moving event. Euro/dollar climbed to a one-month high but failed to trade above the 1.0917 level, and it is now trading well off that high. The euro has been showing unexpected strength despite the weaker growth outlook and the lingering political risk. The ECB actually meets next week, but it is expected to keep its powder dry and instead prepare for a September move, provided of course that the fragile political situation in France does not lead to a significant rise in French sovereign bond yields.

Gold jumps but equities mixed

In the meantime, gold is in the red today after recording a significant jump and testing the mid-May highs. It remains around the $2,400 level despite the recent negative newsflow regarding the buying appetite from China. With geopolitics taking a backseat lately, the dollar’s ongoing weakness appears to be the main reason for the current upleg in gold.

On the other hand, US stocks appear confused after the weak CPI report. Both the Nasdaq and the S&P 500 stock indices finished yesterday’s session in the red despite the market firmly believing that a Fed rate cut is around the corner. Profit taking, mostly in technology stocks, appears to be the reason for this reaction. 

The calendar is rather light with both the producer price index and the preliminary print of the University of Michigan consumer sentiment index due to be released during the US session. Both indications are important, but the market is probably still digesting yesterday’s CPI report and could ignore today’s data, especially if it produces upside surprises. Interestingly, the earnings round for the second quarter of 2024 kicks off today with some major US banks reporting first.

Dollar/yen drops; possible intervention

One of the beneficiaries of yesterday’s market reaction has been the yen. The dollar/yen pair dropped aggressively towards the 157-yen area with numerous reports pointing to a currency intervention by the BoJ. This looks probable as the Japanese government could have seen the weaker US CPI report as an opportunity to engineer a small yen recovery.

Three top Japanese government officials verbally intervened during the Asian session, but none confirmed the alleged currency intervention. This means that the market will have to wait until the start of August when the usual monthly Ministry of Finance figures will be published.