Inflation angst builds

Overnight Headlines

*USD surges higher after strong inflation confirmed

*US equities sold aggressively in broad move lower

*US bond yields surge in biggest daily rise in two months

*Bitcoin plunges to lows of $46,000 after Musk comments

US equities closed sharply lower with small caps and the Nasdaq taking the brunt of the bigger than expected US CPI print. The tech-laden index is now down around 8.5% from the highs in just nine trading days, while the Vix has spiked to 27.59. All sectors were lower in the broader S&P500 with the exception of energy. Stocks are on track for their worst week in more than six months.

USD bounced strongly after printing 10-week lows on Tuesday. Similarly, EUR/USD retreated below 1.21 leaving behind its 10-week peak at $1.2181. USD/JPY hit a five-week top of 109.78 briefly taking out the previous May high and now sits above an important Fib level, after US bond yields woke up and surged 10 basis points to touch 1.70%.

Market Thoughts – Fed questions continue

While Elon Musk announced that Tesla had suspended taking Bitcoin for vehicle purchases, the market is more concerned with the jump in US inflation that bludgeoned stocks lower once more and sent bond yields surging higher on worries the Fed might have to move early on tightening. Higher inflation and especially wage inflation will dominate GDP gains and squeeze profit margins so it plays to a more choppy and less bullish equity bias.

Fed officials have been quick to downplay the impact of a unique month with base effects to the fore, but investors have reacted by pricing in an 80% chance of a Fed rate hike as early as December. Higher US rates are obviously helping the US dollar at this stage so once more the market is facing off with the Fed. The “transitory” issue potentially comes down to demand as if it remains strong after the economy reopens based on the unprecedented monetary and fiscal stimulus, inflation pressures will continue as costs of production will carry on rising and businesses will have flexibility to raise product prices.  The Fed’s ability to manage inflationary expectations is coming to a head but its remains steadfast so far.

Chart of the Day – USD/JPY pipes up

USD/JPY is strongly correlated to the US 10-year yield and as that popped higher yesterday, so USD/JPY has jumped to levels not seen since mid-April. It was the strongest one day move since November last year so some consolidation after such volatility should be expected. Support now lies at the 50-day SMA and the 23.6% Fib level at 108.98 and momentum indicators are starting to get bullish. The first resistance lies at the May high at 109.70 but if markets do push yields higher, then traders will try and target 110 and then the March high at 110.96.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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