Risk Appetite Deteriorates Further as US Inflation Skyrockets

Although EU equities traded slightly higher yesterday, Wall Street and Asian stocks tumbled after the US CPIs for April came in higher than expected, intensifying speculation that the Fed may indeed have to start normalizing its monetary policy earlier than previously thought. With that in mind, moving forwards, we will closely monitor comments by Fed officials to see whether they still believe that the inflation surge will be temporary.

USD Gaines, Equities Pull Further Back on Inflation Surge

The US dollar continued outperforming all but one of the other G10 currencies on Wednesday and during the Asian session Thursday. It gained the most versus SEK, NZD, AUD, and JPY, while it was found virtually unchanged against CAD.

The strengthening of the US dollar, combined with the weakening of the risk-linked Aussie and Kiwi, suggests that markets continued trading in a risk-off fashion yesterday and today in Asia. However, the weakening of the Japanese yen points otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, although major EU indices ended their session slightly up, the US ones finished well in the red, with Nasdaq falling the most. The negative appetite rolled over into the Asian session today as well.

Yesterday, the main item on the agenda was the US CPIs for April. The headline rate jumped to +4.2% yoy from +2.6%, exceeding the +3.6% forecast, while the core one rose to +3.0% yoy from +1.6%. The forecast for the core rate was for a jump to +2.3%. The more-than-expected surge in inflation may have intensified speculation that the Fed may have to start normalizing its monetary policy earlier than previously thought, and that’s why equities continued to tumble and the US dollar kept strengthening. Nasdaq tumbled the most given that high-growth tech companies are valued based on earnings expected years into the future, and thus, when expectations over higher interest rates rise, there is more concern that the discounted present values of those companies will decline.

Despite some Fed officials sticking to their guns ahead of the release that any surge in inflation is likely to prove to be temporary, those who spoke after the release appeared slightly more skeptical. Fed Vice Chair Clarida said that he was surprised by the CPI report and that if inflation proves not to be transitory, they will use their tools to bring it under control. However, he also added that the CPIs are just one data point, as was the jobs report, which was a disappointment. Atlanta Fed President Raphael Bostic was also a bit vague, just noting that it’s too soon to judge whether the inflation trend is worrisome, avoiding to say confidently that the surge is due to transitory factors.

As for our view, a lot will depend on what other Fed officials have to say moving forward. If more of them appear a bit skeptical following yesterday’s data, the stock market is likely to continue retracing, while the US dollar may continue to strengthen. On the other hand, if the consensus among them is still that the inflation spike will prove to be temporary and that it is still too early to start discussing withdrawing policy support, risk appetite is likely to return to the market. Equities and other risk-linked assets are likely to rebound, while the US dollar and other safe-havens are likely to come under renewed selling interest.

DJIA – Technical Outlook

After hitting a new all-time high on Monday, at 35092, the Dow Jones Industrial Average index is now seen to be declining further. The bears were able to push the price below one of its key support areas, at 33700. For now, it seems that the index may continue drifting a bit more to the south, however, let’s not forget, overall, the DJIA is still trading well above a medium-term tentative upside support line drawn from the low of January 31^st. So, this move lower might still be seen as part of a larger correction.

For now, we will continue aiming lower, as long as the price remains below the 33700 hurdle, marked near the lows of April 20^th, 22^nd and 23^rd. DJIA may drift to the 33255 zone, a break of which could clear the path towards lower hurdles. That’s when we will consider a possible test of the area between the 32805 and 32868 levels, marked by the inside swing high of March 23^rd and the low of March 29^th. Around there, the DJIA could also test the aforementioned upside line, which may provide additional support.

Alternatively, if the index reverses to the upside earlier and climbs back above the 34251 barrier, marked by the high of April 16th, that could attract more bulls into the field, possibly setting the stage for further upside. DJIA might then drift to the inside swing low of May 10th, at 34703, a break of which could clear the path towards the 35092 level, which is the current all-time high.

GBP/USD – Technical Outlook

GBP/USD took a dive yesterday, as DXY strengthened after the US inflation report. The pair made its way below the 21-day EMA and currently is still trading below it. If the US dollar continues to strengthen today, we might see a further decline in GBP/USD. That said, this move may still be a temporary correction, if the short-term tentative upside support line, taken from the low of May 3^rd, continues to provide support.

A further push south, below the 1.4050 hurdle, marked by yesterday’s low, could attract more sellers, who may send the rate towards the 1.4009 zone, or the 1.3975 area, marked by the high of April 20^th and the high of April 29^th. Around there, the pair might test the aforementioned upside line, which if holds, could invite the bulls back into the field. If so, this could give GBP/USD a boost again, potentially sending the rate back to the 1.4050 zone, a break of which might clear the way to the 1.4104 level, marked by an inside swing low of May 11^th.

On the other hand, if the previously-discussed upside line breaks and the rate falls below the 1.3931 zone, marked by the high of May 3^rd, that could attract more sellers into the game. Such a move may result in further declines, possibly bringing the pair to the 1.3890 obstacle, or to the 1.3857 area, marked by the low of May 6^th. A temporary hold-up might happen there, however, if the sellers are still in control, they could send GBP/USD to the 1.3800 level, marked near the current lowest point of May.

As for Today’s Events

Following yesterday’s US CPIs for April, today, we get the US PPIs for the month. Expectations are for both the headline and core rates to jump to +5.9% yoy and +3.7% yoy, from +4.2% and +3.1% respectively, but bearing in mind the upside surprise in the CPIs yesterday, we cannot rule out a similar reaction in the PPIs today. Initial jobless claims for last week are also coming out and the forecast points to a small decline, to 490k form 498k.

We also have five speakers on today’s agenda and those are: BoC Governor Tiff Macklem, BoE Governor Andrew Bailey, BoE MPC member Jon Cunliffe, Fed Board Governor Christopher Waller, and St. Louis Fed President James Bullard.

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