More gains for stocks with the FTSE 100 pushing on to 7,775, moving further towards breaking its May 2018 all-time high at 7,903, and the DAX in Frankfurt driving towards the15,000 level. The Stoxx 600 hit its highest since April as traders see cooler US inflation as a boon to risk appetite. It was another solid day for Wall Street with the S&P 500 rising more than 1.2 per cent and the Nasdaq up 1.75 per cent – gains ahead of the CPI betraying optimism that inflation has peaked. Investors also think that stocks look relatively cheap – but only compared to the last few years when we had negative real rates. When compared to historic periods of inflation and positive real rates, stocks are still a little expensive.
So where next...? The US CPI is on tap at 13:30, and this is going to be directional for the market. Further signs of easing will be taken as a positive. But the expectation for a sharp deceleration in inflation creates a relatively high bar for bulls.
US CPI report eyed
Inflation is set to rise 6.5 per cent from a year ago, down from 7.1 per cent in the prior month. Core is seen at 5.7 per cent, compared with 6 per cent the month before, and +0.3 per cent month-on-month, compared with 0.2 per cent in November.
China’s CPI out this morning matched expectations at 1.8 per cent y/y vs 1.6 per cent prior while PPI came in higher than expected at 0.7 per cent from 1.3 per cent prior. EURUSD could jump to 1.10 if the CPI is weak…
ECB sounding hawkish; euro seen with clear run higher
The call on the euro is to do with central bank divergence – the Fed slowing just as the ECB wakes up. Relative hawkishness from the ECB – as the Fed starts to slow the pace of hikes – is seen allowing the euro to make further runs higher against the dollar. Comments from a couple of ECB officials yesterday underlined where the governing council seems to sit... Governing Council member Holzmann said rates will have to rise “significantly further to reach levels that are sufficiently restrictive to ensure a timely return of inflation to target”, adding that core inflation has not yet peaked. Rehn echoed the view that rates will still need to rise “significantly”.
Copper
Running out of steam for now but 4.2 looks ripe for retest...
Neil Wilson is the Chief Market Analyst at Finalto
