US equity indices manged to post a third straight day of gains overnight, a first for 2018. The Dow closed 0.1% higher, the S&P gained 0.2% and the Nasdaq pushed 0.4% higher. Wall Street was seen clinging to a winning streak and as volatility eased, an air of calm returned as investors look cautiously ahead to today’s US inflation data. Financials were standout performers, whilst energy stocks dominated the lower reaches as the price of oil remained under $59 per barrel.
Despite the positive close in Wall Street, Asia saw a mixed session with the Nikkei under selling pressure early on following a disappointing print for Japan’s Q4 GDP. Interestingly USD/JPY barely flinched at the reading, suggesting that investors are reluctant to make a move before the US CPI release. Europe is seen taking the lead from the US with futures across the board pointing to a stronger start.
Will US CPI confirm market fears?
Today’s US CPI release will be one on the most closely watched data prints in recent times. Let’s not forget that the recent rout in equities started with a surprising acceleration in US earnings growth, which promoted fears that inflation may pick up soon, which in turn sent treasury yields higher. Should these fears be played out today in an unexpected strengthening in inflation, then a renewed sell off in equities and bonds could be on the cards and the dollar could benefit. With so much riding on the CPI data, we are expecting a very cautious morning of trading in general.
Whilst stocks have gained over recent sessions the dollar has been out of favour, falling below the key psychological level of 90.00 overnight. The dollar index is trading below both its 200 sma and 50 sma with near term support now seen at 88.60.
Eurozone data to boost EUR/USD early on?
Prior to the US CPI reading at 13:30 GMT (08:30 EST), there is a slew of data from Europe for the markets to contend with. Market moving economic data has been in short supply for the eurozone so far this week, but that looks set to change this morning.
German GDP is due to show that the largest economy in Europe continues to expand at an impressive rate. Meanwhile, German inflation data is forecast to remain constant in January showing a decline of 0.7% month on month and an increase of 1.6% on an annualised basis. Price growth has remained weak even as the German economy has enjoyed robust growth and record low unemployment. Softer inflation in the eurozone’s largest economy is a headache for those policy makers at the European Central Bank looking to wind down the QE programme sooner rather than later. A weak reading could weigh on the euro.
Should the markets be disappointed by a weaker German inflation reading, the eurozone GDP release could offer some reprieve. EZ GDP is forecast to increase 2.7% year on year in Q4. The EZ economy appears to have ended 2017 and started 2018 with strong momentum, with economic growth hovering around the highest level in a decade. A strong reading could send the euro back on its way towards $1.25.
Opening calls
FTSE to open 32 points higher at 7200
DAX to open 69 points higher at 12,265
CAC to open 27 points higher at 5136
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