- US inflation again climbs at a faster pace than previously thought. The inflation rate rises to 3.5%, a 6-month high, and core inflation remains unchanged.
- The CME’s FedWatch Tool reduces the possibility of a rate hike from 56% to 18% for June 2024. The highest possibility based on the FedWatch Tool is a cut in September 2024.
- The US Dollar Index rises to a five-month high, while stocks trade lower in both the US and Europe.
- The Euro is declining against all currencies during this morning’s session as we approach today’s ECB’s Rate Decision.
USA30 – The Dollar, Yields and Inflation Pressure US Stocks!
The Dow Jones ended the day 1.28% lower mainly gaining momentum after the US inflation release. The Dow Jones was the worst performing on Wednesday and is trading at its lowest level since February 14th.
The assets have been declining over the past two weeks and is not solely a result of yesterday’s Consumer Price Index. Nonetheless, the CPI data is likely to pressure the stock market for 3 reasons. Firstly, investors are likely to divert capital to other assets which will remain high yielding. The second is due to the heightened risk of lower consumer demand and economic strain. Lastly, the more expensive US Dollar and bond yields can lower demand for US stocks in general.
From the Dow Jones 30 stocks, only 8 held onto their value while the remaining 23 components depreciated. The only stock which saw significant gains was Walmart which is known to be a defensive stock and normally benefits from higher interest rates. Home Depot, Intel and Goldman Sachs saw the largest decline.
This morning bond yields, and the US Dollar are trading slightly lower, however, they remain significantly higher than the day before. If the two continue to rise throughout the day, pressure will continue to mount on stocks, and they may look less attractive despite the discounted price. If traders solely take into consideration the latest inflation release, a more expensive Dollar and higher yields is the highest possibility, but nonetheless, technical analysis will remain key.
This afternoon inflation will remain the key influence. The US will release the producer inflation, of which analysts expect to also increase. The yearly PPI is expected to read 2.2% and if we exclude food and energy, 2.3%. If inflation does increase as expected or even higher, the possibility of inflation stabilizing will decline. As a result, pressure will remain on the USA30.
EURJPY – ECB Left with A Difficult Decision!
The Euro against the Japanese Yen has been declining for three consecutive days but does remain higher than this month’s lows. The value of the Euro will largely be determined by the Dollar and the ECB’s rate decision and Press Conference. Nonetheless, the Euro is decreasing in value against all currencies so far. The Yen on the other hand is witnessing a “mixed” performance.
If investors are wondering if the ECB will cut today, it’s unlikely according to surveys. Bloomberg’s survey of 62 leading economists shows that only 1 economist believed the ECB will push the button. However, most economists do believe they will be the first to cut, which is a negative for the Euro.
The possibility of a rate cut in June is an 80% chance, down from 100% before the CPI release. The decline is due to the ECB not wanting to risk parity, but at the same time, higher interest rates for too long will risk a recession in a region which has not seen growth for a prolonged period.
Michalis Efthymiou
Market Analyst
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