'Mini stagflation’ sees USD index, EUR/USD falter at key averages

All the focus was on CPI, until an unfavourable employment report which threw a spanner in the works. Based on inflation figures alone we could have been looking at higher yields and USD index today, as core inflation beating expectations on a monthly and annual basis. Core CPI increased at 0.3% m/m compared with 0.2% expected and was up 3.3% y/y versus 3.2% forecast.

However, initial jobless claims came in unexpectedly hot, rising 255k last week – 27k above the 231k expected, or 33k above the prior 225k. That is the largest m/m spike in two years and three months. Perhaps this is just a blip, but also note that the 4-week average is trending higher.

With inflation and unemployment higher, we have a mini stagflation on our hands. Of course, one set of data points cannot be taken as seriously as stagflation, but it is a trend that could significantly change expectations of the Fed’s monetary policy if this hiccups turns into a trend.

The good news is that we only have to wait one week to see if the spike on initial jobless claims is a blip, or the beginning of something more sinister. But traders might take today’s PPI data a bit more seriously given Thursday’s data set.

Wall Street indices took the data within its stride, with the S&P 500, Nasdaq 100 and Down Jones all forming inside day and more or less closing flat for the day. Bond markets took the prospects of weak employment and high inflation more seriously, with the 2-year yield forming a bearish outside day and closing back below 4%, while the 10-year formed a bearish pinbar around the 200-day EMA. The drop in yields saw gold form a bullish engulfing day at the support zone highlighted in yesterday’s report, and the bias for a leg higher remains in place with gold seemingly acting as a safe-haven asset once more.

USD index futures, EUR/USD technical analysis:

The USD index has risen 3% over the past nine days, before it stalled at the 200-day MA, just beneath the 103 handle. An indecision day formed alongside increased volume from the day prior, which can be an indication of a ‘change in hands’ from bulls to bears. The daily RSI (2) had also spent several days overbought, so the rally could be in the need of a pause at the least.

However, the bullish momentum that sent prices here is so strong that we may find any pullback to be limited. Unless the 103 area proves itself to be a repeated area of false breaks (like we saw with bears around 100). So unless incoming US data falls below expectations – particularly employment figures – we may find any such retracement to be limited.

Also note that EUR/USD stalled around my 1.09 downside target, which is near the 200-day EMA. Again, momentum to this point has been very strong which suggest bounce could be limited. Especially if the ECB deliver a dovish cut next week. But for both markets, the move appears to be stretched so bears may want to be cautious around current levels on EUR/USD.

Events in focus (AEDT):

I suspect US PPI figures will garner more attention today given the hot print with CPI figures. There’s not a particularly tight relationship between the two on a per-month basis (a hot print in one does not necessarily equate to a hot print in another), but it could help trigger more of a pullback on the US dollar and yields of it does. And dare I say Wall Street indices may take it a tad more seriously.

• 08:30 – NZ business PMI
• 08:45 – NZ visitors and migrations
• 10:50 – JP money supply
• 17:00 – UK GBP m/m, industrial production, manufacturing production, construction output, trade balance
• 17:00 – DE CPI
• 23:30 – US PPI
• 23:30 – CA employment

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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