Stocks make new record highs as USD turns lower

Stocks make new record highs as USD turns lower

Headlines

* Fed’s Daly says rate cuts may be needed next year to prevent overtightening

* JPY tumbles as BoJ sticks with ultra-loose policy   

* Treasury yields falls as traders continue to assess prospects of Fed rate cuts  

* Gold pushes struggles towards $2050, oil rebound continues

FX: USD sold off as it nears the recent low on the DXY at 101.77. Markets continue to push for lower Treasury yields and rate cuts amid intense Fed speculation. Central bank officials have tried to dampen early policy loosening chatter, but without any real success. There is above a 70% chance of a rate cut in March.

EUR gained after underlying price trends moderating in November but remaining elevated. We had pushback versus the current expectations for rate cuts in the region from ECB officials. Resistance above is strong just above 1.10 with the recent top at 1.1017.

GBP rallied as investors seemed to jump on board the growing divergence between the BoE and Fed policy next year. MPC member Broadbent also warned that sticky wages may mean that the bank has to hold rates high for longer to drive out domestic inflation. The recent cycle high is at 1.2794.   

USD/JPY spiked higher to 144.95 on the unchanged BoJ decision and meeting. Prices then pulled back will traders loading up on more weak dollar positions. The 200-day SMA is at 142.65, plus a long-term Fib level just below. The BoJ disappointed many looking for policy tweaks or hints to changes in the new year. But the bank said inflation is likely to be above 2% through 2024. That could pave the way for policy normalisation.

AUD was firmer and hit a fresh five-month high on the RBA minutes tone and weaker dollar. The NZD also made new cycle highs towards 0.63 while USD/CAD fell to new lows as CPI data ticked higher than expected and cooled rate cut bets.

Stocks: US equities continued to rise to record highs. The S&P 500 added 0.59% to settle at 4,768. The tech-heavy Nasdaq 100 finished 0.49% higher at 16,811. The Dow was up at 37,557.The Russell 2,000 and equal-weighted S&P led the NDX and SPX, with the lower yield environment helping after the BoJ stood pat.

Asian futures trade mixed. APAC stocks were also unconvinced with a subdued start. The ASX200 was supported by the gold and energy sectors. The Nikkei 225 shot higher after the BoJ stood pat. The Hang Seng saw losses with property the main drag.

Gold jumped up close to 0.6% on the falling dollar and Treasury yields.

Day Ahead – UK CPI

Expectations are for headline CPI in November to cool to 4.4% y/y from 4.6%. The core measure is seen slipping to 5.5% y/y from 5.7%, The October report saw the headline decline sharply from 6.7%, while core inflation fell to 5.7% from 6.1%, while the services measure slipped to 6.6% from 6.9% (vs. MPC forecast of 6.9%). Analysts noted that the decline in the headline rate was not too surprising following last year’s 25% increase in household energy bills, which fell out of the annual comparison.

For the upcoming release, economists expect that food and energy price inflation will likely contribute to declines once again with scope for goods prices to keep easing. But declines will not be uniform. From a policy perspective, the BoE opted to hold rates at its December meeting and maintained guidance that policy will need to be restrictive for an “extended” period of time. Inflation remains a key driver for policy and GBP so there may be some volatility around current BoE pricing.

Chart of the Day – EUR/GBP dips lower

This pair has traded in two distinct ranges for most of this year between 0.87 and 0.89, and 0.85 and 0.87. The former kicked off the first part of 2023 until May. The lower range has continued through to December. Prices are currently below the 200-day SMA at 0.8658. Support is at 0.8547 and below with the year-to-date low at 0.8492.

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