Inflation Numbers Higher than Expected – Nasdaq Jumps 2%
Key US inflation data was slightly higher than anticipated overnight, increasing expectations that the Federal Reserve will raise rates by 25 basis points in a week’s time. US stock indices initially dipped following the release but recovered strongly in the afternoon, led by tech stocks. The Dow closed up 0.31%, while the S&P 500 and Nasdaq posted stronger gains, closing up 1.07% and 2.17% respectively. US Treasury yields rose, though not as sharply as some had expected. The 2-year yield gained 3 basis points to 3.645%, while the 10-year added 1 basis point to 3.655%. Oil prices rebounded from recent lows as concerns over production shutdowns in the Gulf of Mexico escalated, with Brent up 2.05% to $70.61 and WTI climbing 2.37% to $67.31. Gold saw choppy trading within its recent range but ultimately closed down 0.2% at $2,512 an ounce.
More Gains Ahead for the Greenback
The US dollar had a muted response to last night’s CPI data, appreciating by less than 0.1% on the DXY and remaining within recent ranges against most major currencies. A noticeable disconnect has emerged between market estimates of next week’s Federal Reserve rate hike and how the currency market is trading. Currently, the market is pricing an 85% probability of a 25-basis point hike next week, up from last week’s 50/50 odds. Both the dollar and treasury yields have been driven by these forecasts in recent weeks, though the correlation appears to have diminished. Some in the FX market suggest that this movement was anticipated, and traders are now awaiting the next catalyst to push currency pairs into new ranges. Tonight’s PPI data, along with the ECB’s announcement, could provide the impetus for the next market shift.
Another Busy Day Ahead for Traders
Traders are gearing up for another busy day in financial markets, with the European Central Bank expected to raise rates again and further US inflation data due. The Asian session has a relatively light calendar today, but markets are expected to remain active as investors digest last night’s US inflation report. The day’s main risk events are concentrated around the European and US trading session crossover, with the ECB rate decision and press conference bookending US PPI data and weekly unemployment claims. Later in the day, Swiss National Bank Chairman Thomas Jordan is scheduled to speak, and the US 30-year Bond Auction results are expected towards the close of trading.
