From Marc to Market:
Overview: The US dollar enjoys a firmer today ahead of the CPI and ECB meeting outcome. After falling to a new low for the year against the Chinese yuan earlier today, it has recovered and is higher on the day. The market is pricing in almost a 10% chance of a 50 bp cut next week, but a rise in the headline CPI, the fourth in a row, can see this re-assessed, which could help the greenback extend its recovery. There is little doubt about the outcome of the ECB meeting. It will stand pat while updating its macroeconomic forecasts. The dollar is enjoying a firmer tone against the emerging market currencies too.
The new French prime minister is talking with the various parties before appointing ministers, but the French 10-year premium over Germany has narrowed slightly more today and French stocks are outperforming the German DAX. European benchmark 10-year yields are mostly slightly firmer but for France and Italy today. Remember, Fitch is set to announce the results of its credit review of France late tomorrow (currently AA- with a negative outlook). The 10-year US Treasury yield fell to a five-month low yesterday, slightly above 4.02% and is now 4.04%-4.05%. Equities are mostly firmer today. The Nikkei is at a new record high, and China's CSI 300 surged 2.3%, the biggest gain since mid-March, with AI-related shares in high-demand by retail investors. Only Hong Kong and Australia among the large bourses failed to gain today. The Stoxx 600 in Europe is firmer, recovering from yesterday's minor loss, and US index futures are firmer. Gold is heavy. The record high was set Tuesday, almost $3675 and has been sold through yesterday's low (~$3620). Initial support may be around $3600. Yesterday's geopolitical tensions in the Middle East and Eastern Europe helped lift October WTI for the third consecutive session, but the lack of further development has seen it steady today. It is little changed around $63.50.
USD: The Dollar Index traded choppily yesterday in a roughly 97.60-95 range and is edging up to fray the 98.00 level in late European morning activity ahead of the CPI report. A move above 98.25 lifts the technical tone. Yesterday's session low was recorded around two hours after the PPI report, but it recovered and settled little changed on the day. Yesterday's PPI was softer than expected, falling 0.1% last month at the headline and core levels, and July's 0.9% gain was trimmed to 0.7%. Today's CPI is more important in terms of policy and implications for the PCE deflator. A 0.3% increase in the headline CPI would lift the year-over-year rate to 2.9%, the highest since January. But, due to the base effect, a 0.3% rise in the core rate would leave the year-over-year rate unchanged at 3.1%. When the Fed cut rates by 50 bp in September 2024, headline CPI had been falling for several months. It peaked in March 2024 at 3.5% and fell to 2.5% in August....
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