Inflation expectations soften

Stock markets kicked off the week mixed, the European markets were up yesterday, while Nvidia plummeted the mood in the US, sending Nasdaq slightly lower.  

Nvidia shares dived 6.30% yesterday on news that the company missed its revenue projection by $1.4 billion due to slower demand for PCs and gaming. Nvidia pulled other US chipmakers into the negative along with it, and brought the question of whether the chip rally, which was triggered by a $52 billion government help is over. AMD fell more than 2% yesterday after having rallied 45% since the start of June. Micron lost more than 1.50%, following a 26% rally. Intel was little changed, but the stock price is down by 46% since last April. 

Inflation expectations drop 

The dollar index gave back gains following the blowout NFP figures printed on Friday.  

Investors are confident that inflation in the US may have peaked last month, as the New York Fed's Survey of Consumer Expectations showed steep drops in inflation expectations in July.  

For economists, inflation expectations are more important than the actual data, because it is believed to be self-fulfilling.  

Plus, Federal Reserve (Fed) chair Jerome Powell mentioned the New York Fed's results as a reason for more aggressive rate increases at the June FOMC meeting.  

Therefore, the latest NY Fed survey may have given some relief to the Fed, although, tomorrow’s CPI print will say the last word when it comes to the market sentiment.  

A print in line with expectations, or ideally softer, should calm down the hawkish Fed expectations, whereas a figure above expectations, or God forbid, above last month’s 9.1% would send another shockwave to the market.  

For now, there is reason to be optimistic as the drop in energy and commodity prices should have a cooling effect on inflation, yet, higher labour costs could keep inflation sticky at undesirably high levels.  

Elsewhere

The EURUSD is steady around the 1.02 level, waiting for the dollar to soften on ‘good news’ to make a further attempt toward the 1.0350 mark, where stands the 50-DMA. Given that the European Central Bank played its biggest cards at last meeting, there is not much upside potential from the ECB standpoint. The dollar must soften to let the EURUSD gain field. And the dollar needs inflation to soften to give back some advance.  

On the dollar-yen front, traders now call the end of a particularly winning long USDJPY trade this year. Although the divergence between a more aggressively hawkish Fed, and a carelessly dovish Bank of Japan (BoJ) remains in favour of a stronger dollar, most of the price action is already done and dusted. We expect profit taking, and a meaningful retracement in USDJPY’s value to at least below the 130 support, which was first tested at the beginning of this month, and which could easily be broken to the downside, if the dollar softened across the board with softer inflation, of course.