Last week was all about jobs data, and this week inflation figures are all the focus. US CPI is expected to have eased to 2.6% (on an annual basis), which would be trending in the right direction as far as the Fed is concerned, albeit still above their stated 2% target. Nonetheless, a CPI result around the 2.5% or 2.6% level should be enough to usher in a quarter of a percentage point cut by Jerome Powell and co. at next week’s meeting. A larger, 50bp cut is not entirely out of the question, but I suspect that the Fed would want to avoid ‘wielding the axe’ by implementing a larger cut to commence the easing cycle so as not to panic investors.
With market consensus having firmed in the direction of an expected 25bp US rate cut next week, the USD has continued to consolidate a modest bounce from its early September lows. While the greenback is doing well against the likes of the euro and Aussie Dollar, it is struggling against the Japanese yen given the opposing policy directions expected from the BOJ (Bank of Japan) and FOMC. Subsequently, the USDJPY rate is down nearly 3% over the past month on expectations that there could be another rate hike from the BOJ before year-end.
Gold moved back above the psychological $2500 level with a dip in treasury yields aiding the cause of the precious metal. During Asian trading hours on Wednesday, gold was trading at $2516, below immediate resistance at $2524 with a sterner test awaiting at $2530, a level which has so far protected against further upside. Support remains in the $2470-$2480 region with buyers still keen for the commodity on price dips, with this region having protected any larger dips so far this month. Gold has been moving cautiously higher, but a potential breakout move to the upside could be dependant on a tepid US inflation read this week.
Elsewhere, oil is out of favour at the moment due to demand concerns after weak import and CPI data from China. While Chinese exports were strong in August (coming in at +8.7% versus the +6.5% rise expected), the same couldn’t be said of imports (rising just +0.5%, below the +2% gain expected). Coming on the back of the soft CPI data, the imports picture reveals that domestic demand in China remains subdued – a scenario which does not bode well for oil in the near-term. While OPEC+ have responded to the recent crude price weakness by delaying their output increased until December, this has not helped restore confidence in the energy market. Levels to watch for US crude include support at $64.70, while resistance awaits at $68.20 and $70.30.
Looking ahead, after the Presidential Debate and US inflation data, we also have an ECB (European Central Bank) interest rate decision on Thursday with a 25bp cut looking to be highly possible, while further China data is due on the weekend. As usual, markets will be using macro data releases to try and gauge interest rate trajectories and in-turn yield differentials, as well as the growth outlooks for the world’s two largest economies.
