Waning reflation appetite?

The week hasn’t been pleasant for the market bulls. On Wednesday, the FOMC minutes showed the disturbing truth that ‘many’ Fed members wondered whether keeping the rates ‘high for longer’ was sufficiently restrictive to tame inflation, and if hiking the rates wouldn’t be a better idea. Then, the UK PM Sunak announced a general election beginning of July – way earlier than many expected – abating the slightest glimmer of hope to see the Bank of England (BoE) cut its rates in June. Meanwhile, the latest British CPI data came in hotter-than-expected, anyway, warning that the policy easing wouldn’t necessarily be on the pipeline for June. Across the Channel, the data released this week showed that wage growth in the euro area increased 4.7% in Q1 – a red flag for officials who have been banking on a slowdown to keep inflation in check. And finally, a set of too-strong-to-be-pleasant data from the US gave a final punch to the bulls. The US services PMI accelerated way faster than expected in May, according to the S&P’s preliminary PMI data, manufacturing activity also improved, while jobless claims came in soft. The US 2-year yield – which captures the rate expectations – advanced to 4.95%, the 10-year gilt yield reached 4.25%, the 10-year Bund yield hit 2.60%, the S&P500 and Nasdaq sold off from a record, the Stoxx 600 managed to eke out a small gain, but the FTSE 100 is down by more than 1.50% since last week’s peak, hit by a decent decline in energy prices as well.

Waning reflation appetite?

US crude extended losses below the 100-DMA for a third session, and is set for a further fall toward the $75pb level. Copper futures gave back almost 10% since the Monday peak and gold lost more than $100 per ounce since Monday record. If the reflation trade loses momentum due to a hawkish shift in major central bank expectations, we shall see a period of pullback and profit-taking in risk assets, and a further dollar appreciation against major counterparts.

The US dollar index strengthened past the 50-DMA following the hawkish Federal Reserve (Fed) minutes and yesterday’s strong economic data, the EURUSD slipped below its 100-DMA and is preparing to test the 1.08 support. Cable eased below 1.27 and could reasonably expected to extend losses on the back of fading appetite before the general election, while the USDJPY is now back above 157. Inflation data out this morning showed a slowdown in core CPI to 2.2%, ruling out any sense of emergency for the BoJ to continue hiking the rates. And the AUDUSD tipped a toe below the 66 cents mark this morning and could lose the latest positive momentum if the pair slips below 0.6580, the major 38.2% Fibonacci retracement on the latest rebound.

Clear skies

Nvidia remains a well-sheltered harbor from the rising hawkish winds. Nvidia jumped more than 9% after beating revenue expectations for Q1 and exceeding the forecast for the current quarter. Nvidia is catapulted to the overbought market territory following yesterday’s rally, but nothing suggests that the company’s good fortunes, or demand for AI,  are about to reverse. Therefore, there is a good chance that the $1000 per share level becomes the new dip for those who are willing to jump on the back of a bull.