Tech propels stocks higher, even with hot US inflation

Headlines

* US CPI posts another upside surprise, but early summer cut still in play

* BoJ considering March hike with outcome too close to call

* Markets boost bets on BoE rate cuts after wage growth slows

* Stocks hit more record highs with Dax and S&P 500 advancing

FX: USD jumped on the hotter than expected CPI data. All major prints were stronger than forecast, with a number of categories picking up again after a few months of cooling. Notably, the 3-month and 6-month moving averages of core inflation accelerated. That said, core services due to reduced shelter costs did decline, but core goods prices rose for the first time in three months. The dollar index bounced back to a major Fib level (38.2%) of the Q4 sell-off at 103.09 before giving up some gains.

EUR outperformed all of its peers, holding above 1.09. Last week’s break to the upside is still intact with the top at 1.0981. Germany’s February CPI data was unchanged from preliminary data at 0.4% m/m and 2.5% y/y.

GBP dipped to a low of 1.2746 before paring losses. Sterling had been on the back foot after softer than expected wage growth (5.6% vs 5.7% expected and 5.8% prior). The jobless rate also rose, though there are doubts about the reliability of these stats. Cooler wage pressures and a labour market will be cheered by the BoE who meet next week. Markets firmed up an August rate move for the first ¼ point cut.

USD/JPY bounced off the retracement level (38.2%) of the December/February rally at 146.81. The next minor Fib level is at 148.37. BoJ Governor Ueda’s comments on soft consumption didn’t help the yen initially. But a local media report suggested NIRP would end in March if Friday’s union wage negotiations significantly exceeded last year’s 3.8% gain. The outcome of next week’s BoJ meeting was said to be too close to call with officials split between March and April.

AUD fell below 0.66 with a second consecutive day of losses.  USD/CAD popped above its 200-day SMA at 1.3478 and 50-day SMA at 1.3470. Risk sentiment was relatively buoyant while oil prices were mixed.

Stocks: US equities were mainly in the green with tech/semis roaring back with big gains. The broad-based benchmark S&P 500 closed 1.12% higher at 5,175. The tech-dominated Nasdaq 100 jumped 1.49% to finish at 18,219. The Dow Jones settled 0.61% up at 39,005. Lows in stocks were seen immediately after the CPI data with the S&P 500 making fresh record closing highs. Oracle surged 11.5% with earnings beats and demand for AI infrastructure substantially exceeding supply. The firm said it would make a joint announcement with market darling, Nvidia, in the coming week – a surefire way to ignite your stock! Nvidia itself closed on its intraday highs, up over 7%.

Asian futures are firmly in the green. APAC stocks traded mixed as markets awaited US CPI data. The Nikkei 225 slid early in the session on hawkish BOJ chat. But Ueda’s refrain from similar commentary saw the index claw back losses.  

Gold finally sold off after nine straight days in the green. Yields advanced after the US inflation numbers, pushing up USD. The December spike high is $2148. The first Fib retracement level (23.6%) of the February rally is at $2145.45.

Day Ahead – Digesting US CPI, UK GDP

Only second tier data today, which is released out of the UK. January GDP is seen at 0.2% after the 0.1% contraction in December. The country entered a shallow, technical recession in Q4. But there are high hopes this will be left firmly behind this year. The composite PMI points to better growth. This has all underpinned support for GBP which is the best performing major currency versus USD and the only one in positive territory. The BoE meet next week with eyes on CPI the day before.

Another upside surprise in US inflation data was duly ignored by risk markets, though their rally was squarely due to semis and tech. The small cap Russell index was flat on the day. Bond yields rose with rate cuts for 2024 pulled back only marginally from 88bps before the data to 83bps after. Markets are probably thinking of the bigger picture with price gains only seen in shelter and gasoline. There are also three more CPI, PCE and NFP reports before the June FOMC.

Chart of the Day – Dax hits more record highs

The Dax 40 index is on a tear. After pausing for breathe over the last week or so, Germany’s most important stock market made another fresh all-time peak. This index tracks the performance of the 40 largest and most actively traded companies in Europe’s biggest economy. This is once more a rare piece of good news in Germany, as its growth expectations were recently lowered for 2024 from 1.3% to 0.2%.

But the Dax 40 has little exposure to Germany. In fact, there is a case for a solid inverse relationship between its economic performance and stock market performance. The revenues for the majority of companies are not in Germany so the economy is less important. Rather, the strength of the US economy is more significant while cooling inflation in the eurozone is acting as tailwind for investor sentiment. Indeed, a cheaper euro also potentially helps these companies with heavywieghts like SAP, Airbus and Siemens which generate huge overseas revenues.   

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