All eyes on US CPI data tonight: US Dollar Index, Straits Times Index, EUR/USD

Market Recap

Major US indices gained for the fourth straight session overnight, but market participants still withheld some cautiousness ahead of the US Consumer Price Index (CPI) data release as displayed in the declining volume on the recent up-move, along with a 5% rise in the VIX overnight. Sector performance showed a clear lean towards the energy and rate-sensitive growth sectors, despite Treasury yields ticking higher. The US 10-year is now hovering at around 3.37%, its highest since June this year. The recent equities rally appears to take its cue from its inverse relationship with the US dollar, with further retracement in US dollar providing a catalyst for markets to cheer. That said, considering that the upward trend for the dollar remains intact on the series of higher highs and higher lows, ahead may bring about a moment of reckoning as the US dollar stands inches away from the 107.20 level. This is where an upward trendline seems to lie in coincidence with its 50-day moving average (MA) and holding above this level may reinforce its upward bias and serve as eventual headwinds for risk assets.

Ahead of the US inflation data, market bulls may be riding on the hopes that with an almost-definite 75 basis-point (bp) hike being priced (92% probability) for the September Federal Open Market Committee (FOMC) meeting, along with a 4% terminal rate, it will take a lot more from the upcoming CPI data to drive a more hawkish shift in expectations. Month-on-month (MoM), current consensus is for August US headline inflation figure to show a decrease of 0.1% from July but the core aspect is expected to maintain at 0.3% growth. Year-on-year (YoY), the core aspect is expected to tick higher to 6.1% from 5.9%. This scenario may seem to present a mixed situation, where inflation may have likely peaked but could be seem persistent in heading towards the Federal Reserve (Fed)’s eventual target of 2%. This is also presented in the New York Fed’s Survey of Consumer Expectations overnight. While the median one-year and three-year-ahead inflation expectations both reflected steep decline in August, it stands at 5.7% and 2.8% respectively. Further pushback from the Fed could be likely but for now, with the Fed blackout period in place, market bulls may be hoping to see an underperformance in the upcoming inflation data to continue on its rally.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.38%, ASX +0.55% and KOSPI +1.88% at the time of writing. Being back online from its holiday, the outperformance in KOSPI is largely due to some catch-up gains, which could be mirrored in the Chinese indices later as well, with further gains in Wall Street continuing to provide a positive backdrop for the risk environment in the region. The release of consumer confidence data out of Australia translated into a mixed initial reaction in the ASX 200, despite a bounce in consumer sentiment from its nine-month losing streak. While the improvement could be brought on by the strength in the labour market, further policy tightening is set to continue, which could lead to some shrugging off of economic resilience with the looming US inflation data up ahead.

On the other hand, from the latest SGX fund flow data, the ramp-up in rate hike expectations last week has served as tailwind for our local banks, with the financial sector finding renewed net institutional fund inflows of around S$270 million last week. The three banks accounted for more than 40% of the Straits Times Index (STI) and thus far, the index has managed to defend its 3,200 level, with a break above a descending wedge pattern late last week. However, upcoming sentiments will take its lead from global risk environment, which will be heavily steered by the US CPI data. Any bullish action above the 3,320 level could drive the formation of a new higher high and reiterates its upward trend.

On the watchlist: EUR/USD hanging at upper channel trendline resistance

Despite some weakness in the US dollar overnight, the EUR/USD continues to hang at an upper trendline resistance of a descending channel pattern (in place since February this year), in coincidence with its 50-day MA. The spinning top formation suggests some indecision for now, as market participants continue to digest the recent European Central Bank (ECB) meeting, which displayed clear determination by policymakers to prioritise inflation over growth. The channel resistance remains a key line to watch, considering that it has weighed on the pair on at least five occasions through this year and any upward break could potentially be looked upon as a sign of a longer-term reversal in bearish sentiments. The onus will now fall on the upcoming US CPI data, which will dictate US dollar moves ahead. Any break above the channel trendline resistance may leave the 1.037 level on watch next.

Monday: DJIA +0.71%; S&P 500 +1.06%; Nasdaq +1.27%, DAX +2.40%, FTSE +1.66%