Stocks fall, bond yields rise, dollar rises after stronger CPI

The US CPI came in stronger than expected at 1.3% with an annual rate of 9.1%, a 4-decade high. Excluding food and energy, the 0.7% increase is also above expectations. Hot. Hot. Hot.

Before the number:

  • Dow futures +135
  • S&P+19
  • Nasdaq +72
  • Yield 2 years 3.049%
  • 5 years 2.99%
  • 10 years 2.948%
  • 30 years 3.147%
  • Gold $1728.30
  • Crude oil $96.40

After the number:

  • Dow -218 points
  • S&P -42.5 points
  • Nasdaq -183 points
  • Yield 2 years 3.16%
  • 5-year yield 3.106%
  • Yield 10 years 3.03%
  • Yield 30 years 3.187%
  • gold is trading at $1720.90
  • crude oil is trading at $95.24

The market is implying a 78% chance of a 75bp rise in September now due to the stronger report. A 75 basis point hike at the July meeting if it wasn’t already in the market, it’s now.

On the foreign exchange market, the dollar rose:

  • EURUSD: The EURUSD moved back down to test its lows of the day near the parity level. Current prices are trading at 1.0006. Yesterday the low price reached just below the 1.00 level at 0.99997. Options traders defended the level in the first test. Will they be able to do it again today? Be aware that if price starts to move away from 1.0000 on the downside, options traders may also need to sell to cover their exposure. The high of the day was near 1.0085
  • GBPUSD; GBPUSD traded as high as 1.1942 just before the figure but fell to a new session low of 1.1847 as I type. Yesterday’s trade low price extended to 1.18066. The move down extended below last week’s low at 1.18753. This is now a level of risk for traders today. Staying below is more bearish
  • USDJPY: USDJPY trades at 137.05 just before the figure, and is moved to a new high of 137.71. Monday trade high price hits 137.747. Current prices just below this level. A break above would trade at another new high dating back to 1998.
  • USDCAD: The USDCAD moved from 1.2978 to a new high at 1.3056. The price is currently trading in a swing high zone between 1.3051 and 1.30548. Current prices are trading at 1.3054. A move above 1.30548 with momentum would prompt traders to target last week’s highs between 1.3075 and 1.35826
  • AUDUSD. AUDUSD has moved from around 0.6800 to a low of 0.6727 so far. The price is currently trading at the low. Price is back below early July lows which formed a base between 0.6761 and 0.67635. This is now the near risk level for shorts. Staying below is more bearish.

/ inflation

Inflation

Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general price level where a given currency is effectively buying less than it has in previous periods. In terms of evaluating strength or currencies, and by extension foreign currencies, inflation or its measures are extremely influential. Inflation stems from the global creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply relative to the wealth produced (measured with GDP). This thus generates demand pressure on a supply that is not increasing at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare the different purchasing power of each country based on the general level of prices. By doing so, it helps to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates in the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on the exchange. Conversely, too low inflation (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the foreign exchange market.

Inflation is defined as a quantitative measure of the rate at which the average price level of goods and services in an economy or country increases over a period of time. It is the rise in the general price level where a given currency is effectively buying less than it has in previous periods. In terms of valuation of strength or currencies, and by extension foreign currencies, inflation or its measures are extremely influential. Inflation stems from the global creation of money. This money is measured by the level of the total money supply of a specific currency, for example the US dollar, which is constantly increasing. However, an increase in the money supply does not necessarily mean that there is inflation. What leads to inflation is a faster increase in the money supply relative to the wealth produced (measured with GDP). This thus generates demand pressure on a supply that is not increasing at the same rate. The consumer price index then increases, generating inflation. How Does Inflation Affect Forex? The level of inflation has a direct impact on the exchange rate between two currencies on several levels. This includes purchasing power parity, which attempts to compare the different purchasing power of each country based on the general level of prices. By doing so, it helps to determine the country with the most expensive cost of living. The currency with the higher inflation rate consequently loses value and depreciates, while the currency with the lower inflation rate appreciates in the forex market. Interest rates are also impacted. Inflation rates that are too high push interest rates up, which has the effect of depreciating the currency on the exchange. Conversely, too low inflation (or deflation) pushes interest rates down, which has the effect of appreciating the currency on the foreign exchange market.
Read this term

Garland K. Long