Huge comeback in Wall Street despite high inflation print: S&P 500, USD/CNH, US dollar index

Market Recap

An initial move lower for major US indices on a hotter-than-expected inflation data was massively overturned as the extreme bearish positioning heading into the consumer price index (CPI) print may drive dip buyers to challenge the availability in supply of new sellers. The attempt has proved to be successful overnight, resulting in a 5% swing from being 2% in the red to closing 2.66% higher for the S&P 500. This came despite an upward shift in interest rate expectations, potentially due to some short squeeze activities playing out, with the aggressive covering of shorts amplifying the up-move in the equity markets. The two-year Treasury yields, being most sensitive to policy expectations, increased to its highest level since 2007, but that seems to leave a potential bearish divergence formation on watch in both the moving average convergence divergence (MACD) and relative strength index (RSI).

For the second consecutive month, US consumer prices surprised to the upside in both the headline and core readings. From the Federal Reserve (Fed) Funds futures, the outperformance has firmly anchored a 75 basis-point (bp) hike in the November Federal Open Market Committee (FOMC) meeting, with further bets that another outsized 75 bp hike is needed for the December meeting as well. Services inflation at its 40-year high accounted for the persisting pricing pressure as shelter costs increased 0.7% from the previous month, with the component taking up close to one-third of the CPI weightage basket. While US housing prices have shown some early signs of moderating growth, it could take some time for the moderation to seep into rental costs. Food and medical care contributed to the upside surprise as well, with the overall increase more than offset the 4.9% decline in gasoline prices.

With the surprise positive reaction to the CPI data, markets may attempt to follow through with the recovery as the possibility of further unwinding of shorts remains. The highly-feared US inflation data release is now behind us, which provided some breathing room for risk sentiments before the next FOMC meeting in November. Market attention will now shift towards the upcoming US earnings season, with the US retail sales data and earnings release from major US banks in focus. An initial move lower for the S&P 500 has led to dip-buyers defending the 3,500 level successfully, with the level indicating the level of completion of a previous head-and-shoulder pattern. A bullish divergence on both MACD and RSI could suggest weaker selling momentum on the lower lows in the S&P 500, with a potential attempt to retest the 3,800 level once more. A follow-through of a bullish hammer candlestick reinforces that.

Asia Open

Asian stocks look set for a strong positive open, with Nikkei +2.23%, ASX +1.56% and KOSPI +1.46% at the time of writing, with the surprise rebound in Wall Street providing a positive backdrop for risk sentiments to recover in the Asia region as well. Some reliefs are looked upon with the retracement in the US dollar index, while upside in US 10-year Treasury yields saw another rejection above the 4% level.

This morning saw the advance estimate for Singapore’s quarter three (Q3) gross domestic product (GDP) growing 1.5% quarter-on-quarter (QoQ), delivering a pushback against a technical recession from previous quarter’s 0.2% contraction. Strength in services and construction sector provided the heavy-lifting, which offset the 3.3% decline in manufacturing. That said, the economic outlook remains downbeat, with more persistent inflation and ‘intensified’ downside risks to growth being highlighted ahead.

The Monetary Authority of Singapore (MAS) also delivered further tightening in terms of the re-centring of the mid-point of the policy band, not a surprise with inflation in August showing no signs of peaking. What was surprising could be the absence of a double-barrelled move, which marked a more measured and less-aggressive approach to what some may expect. However, despite the current fifth round of tightening over the past one year, the upside risks to inflation remain, with core inflation expected to remain above trend at 2.5–3.5% and headline inflation at 4.5–5.5%. That may leave further tightening on the table in the April and October 2023 meeting, or even the possibility of off-cycle tightening moves next year. The USD/SGD has seen a sharp move lower on the more persistent inflation forecast, seemingly on track to complete a double top pattern. Any break below the 1.420 level will be on watch, which may draw further downside to the 1.407 level next.

China’s inflation data will be on watch later today, with the inflation environment not much of an issue for China for now. September consumer prices are expected to remain below the People's Bank of China (PBOC)’s 3% target, while producer prices are expected to see a tepid 1% growth from previous 2.3%, suggesting limited cost pass-through ahead. For the USD/CNH, an initial attempt to break above a previous consolidation range failed to hold, as a sharp reversal in the US dollar overrode earlier gains. That said, any weaker-than-expected reading in China’s inflation data ahead could leave the USD/CNH to retain its overall upward trend, amid further room for policy divergence.

On the watchlist: US dollar index tapping on US inflation surprise for some profit-taking

The higher-than-expected US CPI print has triggered an upward shift in US interest rate expectations, but the US dollar index reacted to the downside in response to the more hawkish outlook. This seems to reflect some near-term exhaustion as the conclusion of the September CPI reading drove some profit-taking and markets will focus on the upcoming US earnings season next. On the technical front, the US dollar remains on an upward trend, seemingly finding support at its 20-day moving average (MA) for now but further profit-taking could be in the pipeline. This may leave the 110.20 level in focus next, a level which marks its early-October bounce, along with its 50-day MA. The ongoing upside risks to inflation could retain the overall upward bias for the US dollar for now, leaving the formation of any new higher low potentially on watch.

Thursday: DJIA +2.83%; S&P 500 +2.60%; Nasdaq +2.23%, DAX +1.51%, FTSE +0.35%