S&P and EUR/USD might break higher if US CPI disappoints

Yesterday’s market action

Quiet day across the markets yesterday as traders paused for breath after last week’s strong moves post-FOMC. The Euro continued its march against the dollar, closing just shy of the 1.10 handle, also coinciding with the Wednesday spike higher. Two Fed members, Williams and Fischer, towed the FOMC line in rowing back from the June date for hiking rates, with Fischer saying that ‘rates hikes will likely be warranted by the end of the year’ but that the fed funds rate rise is unlikely to be a smooth path upward. It has been very interesting to note the out performance of the US 10yr in recent sessions against the Bund following months of under performance. As the Fed continues it’s dovish meme, T notes are beginning to look more attractive versus other developed economy debt. ECB President Draghi also spoke yesterday, attempting to allay fears that the ECB’s QE programme will run out of bonds to purchase and driving down German Bunds as a result.

Today’s View

Overnight, notable data releases from Asia included Chinese HSBC PMI coming in at 49.2, below expectations of 50.5, so the Chinese economy struggling to gain any traction this year. That Chinese stock market remains at 5yr highs is more a reflection of investor anticipation of looser monetary policy from the PCOB, joining the ‘race to debase’ with other central banks.

After a quiet few days on the data front, today’s calendar is packed full, the particular highlight being US CPI at 12:30. German PMI data came in solidly above expectations, providing further evidence that the Eurozone economy is gradually improving and lifting the euro versus the dollar up to the 1.10 handle. UK CPI also came out at 0% on a Y/Y basis, leading to mild sterling weakness across the board. Market participants will be eagerly awaiting the US CPI data, with a higher than expected number likely to lead to some profit-taking from euro bulls. Last month’s release, where headline inflation came in at -0.1%, led to that final push lower in the euro and T notes as investors focused more on the ex-food and energy number, which was slightly better than expected and renewed fears that the Fed would hike rates in June after all following Yellen’s previous statements that low headline inflation caused by the energy price falls was likely to be transitory and underlying inflation was of more interest. This time, expect traders to once again focus on the ex-food and energy data when trying to second-guess the Fed’s next move.