Something must give

US inflation came in parallel to expectations, confirming that headline inflation in the US stagnated near 0.3% level for a third month, the yearly figure rebounded from 2.4% to 2.6% as expected, while core inflation remained stuck at 3.3%. The difference between the headline and core inflation comes from weak oil prices, which help tame the index that includes the volatile food and energy prices, but housing, used cars, airfares and medical care continued to push the core figure higher. And the core CPI hasn’t eased since July, averaging near 3.5% this year, according to Bloomberg. In summary, the data looked good, but could’ve been better. The market reaction to the data was mixed. The US 2-year yield eased after hitting a fresh high since summer, the probability of a 25bp cut in December jumped back to 80% from around 60% before the CPI data, and Minneapolis Federal Reserve (Fed) Neel Kashkari hinted that he liked yesterday’s inflation data. On the long end of the curve, however, the US 10-year continued to push higher and is preparing to reach the 4.50% level as next stop amid the rising bets that the yield deserves to hit the 5% mark on prospects of higher inflation under Trump’s pro-growth policies, upcoming tariffs and the Fed’s potential ignorance of the upcoming inflationary pressures. The US 30-year yield is now at 4.65%.

As such, the US dollar – that looked slightly soft after the CPI data –rebounded to extend its rally to fresh highs. The US dollar index has now hit the highest levels in a year, it’s clearly in the overbought market territory, with the RSI index screaming that the dollar has been probably bought too fast and in a too short period of time and a minor correction could be healthy at the current levels. Yet, the picture is clear, the US dollar outlook is comfortably positive and the bulls are tempted to buy on rising suspicion regarding the Fed’s ability to keep cutting the interest rates. Note that the bets for next year cuts have halved since last month.

As such, the EUR/USD tanked to 1.0534 level this morning with the bears eyeing the 1.05 mark. The RSI indicator – that’s warning of oversold conditions in parallel to the overbought conditions of the dollar index – seems to be the only challenge for the euro bears right now. Across the channel, Cable eased to 1.2673, the pair is also very close to oversold conditions. The AUDUSD pulled out the 65 cents support and is weakening below this level, supported by the data that showed that inflation in Australia fell to a 3-year low. And the USDJPY spiked past the 156 level this morning, near overbought as well, but with some additional margin left before the Japanese authorities intervene directly to ease the selling pressure near the 160s level. The USDCHF rallied past the 200-DMA and the USD/CAD has pulled out the 1.40 target and is consolidating gains above this psychological mark. I believe that the temptation to long the US dollar at the current overbought levels should start fading in the short-run and bring in some tactical shorts to ride on a minor correction. But the medium-term outlook looks bullish for the US dollar. Price pullbacks could be interesting opportunities to strengthen the bullish US dollar positions.

Data watch

The US will reveal its latest PPI update today, and the figures are expected to point at an uptick in factory-gate prices in October. The headline PPI is seen rebounding from 1.8% to 2.3% in October, and core PPI from 2.8% to 3%. And don’t forget that there are components in these figures that feed into the Fed’s PCE index. Therefore, even if these numbers are in line with expectations, they should be warning that a 25bp cut from the Fed is probably not the right thing to do. I am not saying that the Fed won’t do it. I am just saying that it’s probably not the right thing to do.

Fed Chair Powel will speak today. I am curious to hear what he say to say, if he says anything at all in the face of the US politics that are turning into a massive TV reality show.

Elsewhere, the S&P500 consolidated near ATH levels, Nasdaq 100 was slightly down, while the Dow Jones was slightly up. The Russell 2000 stocks didn’t like the upside pressure in yields probably, because the index fell nearly 1%. European stocks failed to cheer the weaker euro, as Trump is much less supportive of the valuations on this side of the Atlantic Ocean than he is at home. The only positive in Trump’s threats is its potential to push the European Central Bank (ECB) to cut rates thoroughly to give support to the already-weakened European economies. But alas, to do be able to cut the rates, the ECB needs to make sure that inflation has stabilized. Yet, the rapid depreciation of the euro puts that objective in jeopardy.

In energy, oil made a short attempt to the upside yesterday on a surprise decline in US oil inventories last week, but gains remained limited. The barrel of US crude is seeing a strong resistance this morning near the $68pb level. Numerous failures to clear the $72.85pb Fibonacci resistance keeps the market in the hands of the bears, with the ambition to pish the price of a barrel to $65pb target.