Another downside surprise in US CPI, Fed on watch next: S&P 500, USD/JPY, AUD/USD

Market Recap

The downside surprise in US November consumer price index (CPI) has prompted a risk-on rally overnight but major US indices came off sharply from their intra-day high as key technical resistance stood in the way. Some lack of conviction into the upcoming Federal Reserve (Fed) meeting with reservations of a potential Fed’s pushback may be at play as well. The lower-than-expected readings in both US headline (7.1% versus 7.3%) and core inflation (6% versus 6.1%) marked the second consecutive month of soft pricing data, which seek to challenge the Fed’s view of a higher-for-longer rate environment ahead. Market interest rate expectations reacted in the way they should, with the Fed Funds futures revealing a downward revision in terminal rate expectations to below 5% from previous 5.0-5.25% range. The US dollar headed 1% lower, with the formation of a new lower high reinforcing its recent downward bias while Treasury yields saw a broad-based decline. Lower yields lifted the pressure off rate-sensitive growth sectors, resulting in the Nasdaq pulling ahead from other US indices.

From the CPI data, deflationary forces are revealed in a growing number of categories in the likes of energy, utilities, medical care services, used cars and transportation. High-weightage shelter costs also saw a moderation to 0.6% month-on-month (from previous 0.8%). The figures are likely to cool some concerns of persistent pricing forces, with all eyes on the Fed’s reaction next. Heading into the upcoming Federal Open Market Committee (FOMC) meeting, a 50 basis-point (bp) hike remains the consensus and policymakers will likely assert their hawkish stance, as higher equities prices, falling Treasury yields and a weaker US dollar seems to go against their view of tighter financial conditions. The dot plot and economic projections will be key to watch as well, with equity bulls likely to tap on any softer views from the previous meeting to support a year-end rally.

For the S&P 500, the relief after the US inflation data marked an attempt to break above a key downward trendline in place since the start of this year, but that failed to materialise as a push above the trendline resistance lasted only for the first hour. Reservations surrounding a potential conflict between the Fed’s views and recent economic data could drive some profit-taking, considering that US inflation figures remain three-fold that of the Fed’s target. The trendline resistance will continue to be on watch, while near-term support may be at the 4,000 level. Any move below 4,000 may prompt a retracement towards the 3,900 level next, where a lower channel support stands.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.34%, ASX +0.14% and KOSPI +0.76% at the time of writing. That said, gains around Asian indices seem more measured, coming after the paring of Wall Street’s gains overnight, while sentiments are on hold for the last major event to end the year – FOMC meeting. The US dollar retested its six-month low on further evidence of peaking inflation, with the lower highs and lower lows giving it a downward bias. A weaker US dollar tends to be supportive for Asia indices. Economic data this morning saw a divergence in business confidence among large Japanese manufacturers and non-manufacturers, which drew a short-lived reaction in the Nikkei 225 index. The macroeconomic picture surrounding US inflation and upcoming Fed meeting remains the key driving catalyst, with more tech-sensitive indices such as the Nikkei and KOSPI potentially finding greater traction from US tech outperformance.

Falling Treasury yields are driving a narrower yield differential for the USD/JPY (大口）, with the pair retracing more than 11% from its October 2022 peak. That has brought the USD/JPY to retest its key 200-day moving average (MA) once more after a short-lived rejection at the start of the month. For now, the downward bias remains intact with the formation of lower highs and lower lows, with any break below the 132.78 level likely to pave the way towards the 128.58 level next. Resistance remains at the 137.30 level with last night’s bearish rejection.

On the watchlist: AUD/USD heads higher on weaker US dollar

The improved risk environment and further US dollar weakness in reaction to the US inflation data has pushed the AUD/USD to a new higher high after a period of indecision. This comes after finding support at the 0.674 level, which marks a key Fibonacci confluence zone. Holding above this level may reinforce its near-term upward bias. Ahead, a retest of the 0.691 level may be on watch next, where the next stage of Fibonacci confluence stands in place with a near-term channel trendline resistance.

Tuesday: DJIA +0.30%; S&P 500 +0.73%; Nasdaq +1.01%, DAX +1.34%, FTSE +0.76%