This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
US core CPI printed 1.85% yoy or 0.35% mom in January, where this in itself was hotter than the 1.7%/0.22% estimates many had been expecting, where we find the 0.35% rise in core is actually the largest increase since March 2005. Some on the floors have talked about a “whisper” number going around of 0.3%, while some have focused on the changes in methodology in calculating the numbers, which would have increased the volatility in the report, but the bottom line is that core inflation did beat expectations. We also saw headline inflation rising 2.14%, beating the 1.9% consensus forecast, with energy prices offering a substantial boost here.
The inflation number may have come in above the street, but let’s not forget the retail sales report came out on the shy side with a 0.3% mom fall in January (vs 0.2% eyed) while we saw the retail ‘control group’ element (a greater component of sales that feeds into the GDP calculation) effectively flat for the month. This will certainly see economist ratcheted down expectations for Q1 GDP. Let’s also not forget a week or so ago the market got very excited about the Atlanta Fed having an estimate for Q1 GDP above 5% before it was revised down to 4% (on 9 February). Well, that real-time tracking estimate now sits at 3.2%, which seems far more rational.
Tracking this data we have seen some punchy moves in markets, with the combination of weak consumer figures and hotter inflation figures and yet the reversals we have seen is genuinely surprising. When the market wants to turn, it wants to turn and today’s session looks very interesting indeed.
On one hand, we have seen good selling across the US Treasury curve, with the 10-year Treasury now sitting up at seven basis points on the day at 2.90% and this makes sense. However, we can also see that the USD, which initially spiked into 89.80 has given up all the gains and sits at 88.78. We can see USD/JPY, which of course was one of the key focal points in Asia yesterday pushing into ¥107.57 on the CPI print, but this has reversed and is oscillating around the 107 figure. AUD/USD saw a decent push lower from $0.7855 into $0.7730, but now recedes above 79c, so a strong reversal here, and good Aussie employment data (at 11:30 AEDT) could see the ‘battler’ pushing into the mid-79c level. We have also seen a strong reversal in EUR/USD, where price has moved from a post-CPI low of $1.2280 to sit at $1.2436, while GBP/USD has pushed from $1.3800 to $1.4000. So some hard-hitting moves in FX land, especially in emerging market currencies such as the ZAR and BRL.
The USD is firmly in the doghouse again despite a steeper yield curve.
We can see a strong move in US equities too, where the S&P 500 was sold from 2671 to 2630 on the US CPI print, but the market has again reversed and sits up 1.0% at 2688, so a 2.2% reversal has to be respected and the relief can be seen in implied volatility, where the VIX index now resides below 20. The moves in tech have been even more pronounced and it’s a good news day, with broad-based moves in the various S&P 500 sub-sectors. The US yield curve is steeper and the 10-year is approaching 3%, but today it matters little as risk is added to portfolios, although the credit markets still need a little more convincing and we see the HYG ETF (high yield ETF) unchanged on the day. The moves in US equities have helped buoy Aussie SPI futures, which hit an overnight low of 5745 and now sit up at 5835, which in turn see our ASX 200 opening call currently at 5880, for a potential gain of 39 points or 0.7%. We should see a far more stable Japanese equity session today, with our opening call for the Nikkei 225 sitting at 21,330, where any follow-through buying could support the ASX 200 and help push the market into 5900.
Commodities have fired up, led by oil, which has caught a bid with the weekly Department of Energy inventory report showing a lower-than-forecast 1.841 million build in crude stocks. Gasoline stocks increased a sizeable 3.56 million, but if we look at price action in the crude tape, we can see the price has followed the broad reversal in semantics, with crude wearing a 60 handle again and putting on 2.1% and this should reverberate into the ASX 200 energy sector this morning. Gold has added $25 and sits at $1352 (at the time of writing), although base metals are fairly flat, while in the bulks iron ore futures are up 1%, with spot iron ore gaining 1.4%.
While Aussie jobs will be the big event risk of the day, it remains an FX and rates play but it shouldn’t affect the stock market to any great extent. Earnings might though, where we see names such as ASX, EVN, NCM, ORG, S32, SHL, SUN, TLS, TWE and VCX detail earnings numbers.