No surprise in US CPI helps to instil calm in major markets

In line US CPI helps to reduce market volatility

• US CPI as expected: US inflation drops on both core and headline measures.  
• US Treasury yields recover: Yields have rebounded, with markets pricing c. 80% probability of a 25bps hike by the Fed next week.
• USD is more settled: Major forex pairs look far more settled this morning, with USD recovering some recent losses.
• Equities start to build a recovery: Wall Street closed strongly in positive territory with US futures stable overnight. This is lending support to European indices.
• Stronger USD weighs on precious metals: In commodities, gold and silver which had rallied strongly are easing back. Oil is rallying.

Market nerves begin to settle 

US CPI could have been the next catalyst for market fears. However, with inflation just easing back slightly in February, this has helped to calm market fears, at least for now.

Here are the stats on US CPI announced yesterday:

• Headline US CPI increased by +0.4% MoM (+0.4% exp)

• Headline US CPI subsequently fell to 6.0% YoY in February (from 6.4% in January). This was as forecast by the consensus.

• Core US CPI increased by +0.5% MoM (+0.4% expected)

• Core US CPI subsequently fell to 5.5% YoY in February (down from 5.6% in January) which was in line with consensus.

After inflation came in hotter than expected in January, this data has come as a relief for battered market sentiment.

The Federal Reserve will still have a tough job on its hands in navigating the stresses in the banking system and high inflation. 

However, if inflation had once more been higher than forecast it could have sent another wave of risk aversion flooding through markets.

This has been averted, at least for now.

Biden helps to add assurance

With President Biden offering his assurance that “the banking system is safe” there has been a degree of recovery forming. 

Firstly in US interest rates. Markets had jagged back and are now (according to CME Group’s FedWatch) pricing an 83% probability of a 25 basis points hike at next week’s FOMC meeting.

Amid the panic, the Fed Funds futures showed the peak rate had fallen to 4.76% yesterday. However, with a sense of calm being restored this is now pricing for a likely terminal rate of around 5.00%. 

This is settling for markets as it feels like some sense of reality is taking hold again. 

The Fed will be able to increase rates to tackle inflation which still needs to be brought under control. However, with year-on-year inflation falling in February, the problem is not spiralling out of their control.

This is helping to calm volatility in equity markets.

The VIX Index of volatility on S&P 500 options has dropped back from above 28 on Monday and is falling again this morning.

The VIX is seen as a gauge of market fear. A falling VIX reflects a more settled sentiment. There is more to go, but for now, at least it is moving in the right direction.

Can markets now recover?

Looking at major markets, some of the recent moves are retracing:

• USD has rebounded – this is reflected most in USD/JPY rallying. Elsewhere rallies on EUR/USD, GBP/USD and AUD/USD are subsequently stalling.
• Gold is pulling back – the sharp rally of recent days in precious metals is beginning to unwind
• Wall Street has bounced – gains into the close last night, but US futures are just holding steady this morning.

Equities will be an interesting gauge though. If the rally quickly runs out of steam it could suggest there are further concerns that selling pressure could resume.

Watching the rebound in US equities as gold retraces

S&P 500 futures (SP500ft) rebounds into resistance

A sharp rebound took hold on S&P 500 futures yesterday. However, this move is into a band of overhead supply.

The resistance is restricting the rally, with further barriers overhead.

• The resistance between 3901/3947 houses a supply of old bulls from January/February
• The market remains in a six-week downtrend channel
• The falling 21-day moving average (c. 3999) is a basis of resistance now.
• The daily RSI is in a negative configuration having unwound back towards 45/50.

How the S&P 500 futures react to these overhead barriers to gains will be key to the medium-term outlook.

Unless these can be overcome, the rally will struggle and likely come under renewed selling pressure for a retest of 3788/3809 support.

Gold (XAUUSD) is unwinding gains

The sharp gains on gold are now unwinding. 

With three successive strong bull candles, the market has run out of steam at $1914.

This comes as the upside projection target of $1907 of a double bottom base pattern above $1858 has been achieved.

Technically the outlook remains positive, but an unwind is taking hold.

There is good support around $1858/$1870, whilst the daily RSI could also unwind back towards 50 (where unwinding moves have gravitated towards since October).

Support and resistance levels for major Forex, Commodities, and Futures/ Indices

Data: MT5/IXOne

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