The Overnight Report: US CPI Relief

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A relief rally for US equities, Nasdaq in the lead, is boding well for the local bourse on Thursday, as the release of CPI data proved better than feared by some.

By Chris Weston, Head of Research, Pepperstone

Good morning.

Sentiment gets a solid shot in the arm, with traders pushing hard into US-centric risk, selling volatility and US Treasuries, and seeing the coast somewhat clearer for the illustrious seasonal chase of returns to play out into year-end.

We see that US equity, the USD and US Treasury yields have all risen on the day, however, we’ve also seen gold and crude finding solid buyers, while Bitcoin reclaims the US$100k level and targets new all-time highs, with a broad rally seen across the crypto complex.

The US CPI print lit a flame in US equity, with S&P500 and NAS100 futures reacting off the bat, with the most impressive flows seen in the NAS100 (currently +1.8%).

US core CPI may have come in line with consensus expectations at 0.31% m/m, but the ensuing price action suggests that in line was perceived to be good enough for the Fed to ease next week, and we see US swaps pricing a 97% chance the Fed cut by -25bp next week.

We can also take the elements from the US CPI basket that feeds into the core PCE calculation (out later this month) and see the tracking rate for the inflation rate that the Fed set policy to is currently modelled at 0.14% m/m, and a lower rate than the 0.27% seen in October.

We still have the inputs from the US PPI data to add in the session ahead and that will firm up expectations for the PCE tracking rate.

Still, the market has essentially seen one of the last remaining obstacles that could derail sentiment out of the way and the collective has responded.

The move in equity was clear-cut, with traders hitting the offer with a solid low-to-high trend seen in the NAS100 and S&P500 futures.

The NAS100 is clearly the index of choice for buyers, with the MAG7 plays firing up and notable gains in Nvidia, Tesla, and Amazon.

Comms Services, Consumer discretionary, and Tech have therefore led the S&P500 higher, with traders going hard on growth and high momentum, funding these positions, and rotating out of health care, utilities, REITS, and staples.

51% of S&P500 companies have participated in the rally, and while breadth isn’t great, it matters less for index and futures traders if the MAG7 players are firing up.

In FX markets, the USD followed US Treasury yields closely, with the DXY (USD Index) initially trading lower into 106.31 before reversing and now sitting 0.3% higher.

EURUSD pulling below 1.0500 is a key factor behind the reversal in the DXY, with USDJPY rising to 152.63 also offering tailwinds to the DXY.

We’ve also seen good flows in AUDUSD, with a clear bias to position on the long side with the spot rate defending YTD lows.

Today’s (11:30 AEDT) Aussie (November) jobs report will be a risk to AUD positioning, partly because few have any confidence in forecasting the jobs report, but also because it is a significant input into the RBA’s thinking.

The market looks for 25k jobs to have been created in November, with the U/E rate expected to tick up to 4.2%.

Turning to the Asia equity open, the ASX200 should unwind above 8400 but with market players going hard on growth and high momentum plays, the fact that the ASX200 is a well-defined value index will limit the upside.

The Aussie equity market will also need to consider how today’s jobs report impacts sentiment.

A solid jobs report will reduce RBA rate cut expectations, which could weight on risk, but a healthy labour market is never a bad thing either.

Banks, REITS and consumer stocks need careful monitoring.

On the calendar today:

-Australia Nov unemployment rate

-ECB rate decision

-UK Oct GDP

-US Nov PPI

-Platinum Asset Management ((PTM)) ex-div 20c (100%)

St Barbara ((SBM)) AGM

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

Corporate news in Australia:

-National Australia Bank ((NAB)) sells MLC Life Insurance to Nippon Life, which will merge it with Resolution Life

-Judo Bank ((JDO)) is seen as a potential buyer for Scottish Pacific, while Bain Capital Credit and GIC Private are selling shares in Judo

-Sigma Healthcare ((SIG)) and Chemist Warehouse have extended their merger deadline

-Silex Systems’ ((SLX)) subsidiary secures US government funding for uranium enrichment project

-Vulcan Energy ((VUL)) is raising $184m for its Lionheart project

-Champion Iron’s ((CIA)) iron ore sales are temporarily disrupted due to a load-out facility issue at its Bloom Lake mine

-Key figures are leaving Firetrail, a Pinnacle-backed ((PNI)) investment firm

-BHP Group ((BHP)) and Rio Tinto ((RIO)) face class action lawsuits over alleged sexual harassment and discrimination

-Telecom company Spark New Zealand ((SPK)) sold its remaining stake in mobile towers business Connexa to global investment group CDPQ for NZ$314m

The Australian share market over the past thirty days

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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