Downside surprise in US CPI sparked huge rally in Wall Street: DJIA, USD/CNH, US dollar index

Market Recap

The downside surprise in US inflation data has sparked the single best day for Wall Street since April 2020, as the significant underperformance in the US Consumer Price Index (CPI) release drove a ‘more dovish’ calibration of interest rate expectations. US headline inflation turned in at 7.7% (8.0% forecast), while core inflation hit 6.3% (6.5% consensus). Most notably, on a month-to-month (MoM) basis, the core aspect came in at a 0.3% increase (0.5% forecast), which is its slowest pace since July this year. The overall data is supportive of the peaking-inflation narrative, with the downward shift in rate expectations driving a broad-based fall in US Treasury yields while dragging the US dollar below a key trendline support.

This provided the go-ahead for risk assets to rally hard, particularly for the rate-sensitive Nasdaq (+7.4%). Core inflation at the 6% range still suggests that the Federal Reserve (Fed)’s job is not done yet but markets are cheered by the potential earlier shift in pivot timeline. With the next Federal Open Market Committee (FOMC) meeting still a month away, it may provide some runway for risk sentiments to linger for longer.

Looking at the data, shelter costs remained firm at 0.8% MoM, with the underperformance driven by a 2.4% fall in used car prices. Sharper declines in apparel, energy services and medical care services contributed as well. Higher-than-expected jobless claim figures overnight provided an added uplift for risk sentiments with hopes that the Fed’s tighter policies are seeping into the economy with some effectiveness.

For the Dow Jones Industrial Average (DJIA), after breaking above a downward trendline this week, yesterday’s retest was met with a bullish rejection, which marked the formation of a new higher high. Its moving average convergence/divergence (MACD) at its highest level in two years could suggest some overextended bullish sentiments for now, with any weakness potentially driving a bearish divergence on relative strength index (RSI). This suggests that an entry on pullback could be a less-riskier option. Ahead, the line of resistance may be at its August peak at the 34,200 level, while near-term support may be at the 33,300 level.

Asia Open

Asian stocks look set for a strong positive open, with Nikkei +2.58%, ASX +2.65% and KOSPI +2.80% at the time of writing. The sharp fall in US dollar on the US inflation data may provide huge relief for the Asia indices, riding on their historically inverse relationship while fuelling hopes that seemingly less pressure on the Fed’s tightening process may provide lesser trade-off for global growth conditions. A weaker US dollar could also reduce the risks of imported inflation for Asian economies, which may aid to relieve the margin pressures on their firms and deliver a more resilient bottom-line. Along with the outperformance in Nasdaq, the Nasdaq Golden Dragon China Index is up more than 7.5% overnight, with the formation of a higher low aiding to support a near-term upward bias. Chinese tech stocks could be in focus with the strong showing from their US tech counterparts.

Weakness in the US dollar has prompted a break of the USD/CNH below an upward trendline last week, with a recent retest marked with a bearish rejection. The plunge in US Treasury yields may aid to relieve the yield-differential narrative, with the formation of near-term lower highs and lower lows providing a downward bias. The 7.106 level may be on watch as the next line of support.

On the watchlist: US dollar index heads below key support

The broad-based fall in US Treasury yields on the US CPI data overnight has brought the US dollar index to break below a key confluence of support at the 108.70 level. This may mark a significant shift in sentiments, considering that the US dollar has always been nicely guided by an upward trendline, which saw the breakdown of trendline support overnight. The formation of a new lower low seems to point to a continuation of the near-term downward bias. With that, the 108.70 level may now serve as a key support-turned-resistance level, while the 105.00 level could be on watch as the next line of key support.

Thursday: DJIA +3.90%; S&P 500 +5.80%; Nasdaq +7.80%, DAX +4.00%, FTSE +0.97%