US Stocks Rise as Traders Await Inflation Data

July 12, 2023

U.S. stocks experienced a rebound on Tuesday, following a three-session decline, as investors eagerly awaited the release of crucial inflation data later in the week. The Dow Jones Industrial Average closed with a 0.93% gain, rising by 317.02 points to reach 34,261.42.

Similarly, the S&P 500 ended the day with a 0.67% increase at 4,439.26, while the Nasdaq Composite, focused on technology, gained 0.55% and closed at 13,760.70.

In related news, Salesforce’s stock soared by almost 4% after the company announced its plans to implement a price increase across all its offerings in August.

Furthermore, Activision Blizzard witnessed a 10% surge in its shares following a federal judge’s decision to deny the Federal Trade Commission’s request to halt Microsoft’s acquisition of the video game company. This ruling brought the two companies closer to finalizing their deal.

The upcoming release of the June consumer price index report on Wednesday and the June producer price index on Thursday is expected to provide insights into the trajectory of inflation and guide the future direction of interest rates.

Economists surveyed by Dow Jones project a 3.1% rise in the index on a year-over-year basis for last month. While investors anticipate another quarter-point increase at the Federal Reserve’s July meeting, uncertainty looms regarding the central bank’s actions in September, particularly after robust jobs data raised concerns about a potential resumption of rate hikes.

Looking ahead, the second-quarter earnings season is set to commence, with key reports expected from “systemically important financial institutions” such as JPMorgan Chase, Wells Fargo, and Citigroup, as well as BlackRock, PepsiCo, Delta Air, and UnitedHealth, a component of the Dow index, which will release its earnings on Friday.

Data by Bloomberg

On Tuesday, across all sectors, the stock market showed a positive trend with a 0.67% increase. The Energy sector performed exceptionally well, rising by 2.20%. Utilities and Industrials also experienced notable gains, with increases of 1.24% and 1.20% respectively.

Financials, Real Estate, and Communication Services sectors saw healthy gains of 1.19%, 1.17%, and 1.05% respectively. Materials and Consumer Discretionary sectors also contributed to the positive sentiment, with increases of 0.97% and 0.86% respectively.

However, the Information Technology and Consumer Staples sectors had more modest gains of 0.19% and 0.14% respectively. The Health Care sector remained relatively stable, showing no change at 0.00%.

Major Pair Movement

This downward trend comes ahead of the U.S. Consumer Price Index (CPI) report on Wednesday, with market sentiment remaining skeptical about the Federal Reserve’s ability to raise interest rates beyond one more hike, especially as other central banks are moving forward with their tightening cycles.

The upcoming inflation report will be closely watched to shape expectations regarding the Fed’s actions, which will have a significant impact on the value of the dollar. Forecasts indicate that the CPI is expected to decrease from 4.0% to 3.1%, mainly due to a favourable base effect that will turn unfavourable after July.

Additionally, on a monthly basis, a 0.3% increase is anticipated for both the CPI and core inflation, compared to 0.1% and 0.4% respectively in May. The year-on-year rate is projected to slide from 5.3% to 5.0%.

It’s worth noting that core inflation reached its peak last year in October, which will reduce the impact of the Fed-friendly base effect as we approach the end of the year. Regarding currency pairs, the EUR/USD remained stable after breaking above June’s peak and preparing for a pullback before the CPI release.

If the CPI results maintain the bund-Treasury yield spreads on the rebound, the next significant obstacle for the EUR/USD would be April’s 2023 peak at 1.1096. Market expectations currently include at least two additional 25bp European Central Bank (ECB) rate hikes before reaching a plateau, while the Federal Reserve rates are predicted to decrease by 1% between November and September of next year.

External factors like China’s actions and Brent crude oil prices reaching 10-week highs may influence growth, inflation, and currency movements. Furthermore, sterling experienced a substantial increase of 0.45%, reaching its highest level since April 2022 and approaching 76.4% of the dive observed in 2022-23 at 1.2941.

The market has priced in an additional 150bp of Bank of England (BoE) rate hikes by March. USD/JPY also saw a 0.6% increase following its recent decline, with expectations of a potential recovery in the coming months.

Picks of the Day Analysis

EUR/USD (4 Hours)

EUR/USD Gains Momentum Ahead of US Inflation Data

The EUR/USD pair rallied to a two-month high at 1.1027 before retracing slightly and finding support around 1.0980. Later, it regained strength above the 1.1000 level as the US Dollar weakened, while market participants eagerly awaited crucial US data.

Tuesday’s German ZEW survey revealed a decline in expectations and current conditions, aligning with a contraction in economic activity in the Eurozone. With the final German inflation numbers unchanged and an empty calendar for Wednesday, all eyes are now focused on the release of the US Consumer Price Index (CPI) for June.

Analysts anticipate a 0.3% monthly increase, a drop in the annual rate from 4% to 3.1%, and a decrease in the core index from 5.3% to 5%. The outcome of this data will likely impact market sentiment and potentially determine whether the EUR/USD pair can maintain its bullish bias or face downward pressure as attention shifts to the struggling Eurozone economy.

Chart EURUSD by TradingView

According to technical analysis, the EUR/USD pair experienced an upward movement on Tuesday, although it has not yet reached the upper band of the Bollinger Bands. Presently, the price is situated between the middle and upper bands of the Bollinger Bands, while the bands themselves are indicating a likelihood of further upward movement.

This suggests the potential for the price to reach the upper band of the Bollinger Bands. Additionally, the Relative Strength Index (RSI) currently stands at 69, further indicating a bullish trend for the EUR/USD.

Resistance: 1.1033, 1.1057

Support: 1.1002, 1.0965

XAU/USD (4 Hours)

Gold (XAU/USD) Prices Rise as Market Eyes US CPI Data Amidst Dollar Demand

Gold prices experienced an early advance on Tuesday, reaching a nearly month-long peak at $1,938.45. However, renewed demand for the US Dollar caused XAU/USD to trade in the $1,930 range during the American session.

The positive market sentiment, fueled by easing government bond yields and a favourable tone in equities during Asian trading, initially weakened the US Dollar. Nevertheless, the dollar rebounded despite this sentiment carrying over throughout the various sessions.

While Wall Street continues to extend its gains from Monday, financial markets remain cautious ahead of the release of the US Consumer Price Index (CPI). Analysts expect a 0.3% increase in inflation for June, compared to a modest 0.1% in May.

The annual figure is anticipated to be at 3.1%, down from the previous 4%, with the core annual reading predicted to decrease to 5% from 5.3% in the previous month. These CPI figures hold significance as they could provide insights into the future monetary policy decisions of the Federal Reserve (Fed).

Higher-than-expected inflation readings may prolong the central bank’s tightening measures, potentially strengthening the US Dollar across the board as investors seek safe-haven assets.

Chart XAUUSD by TradingView

According to technical analysis, the XAU/USD pair is moving higher on Tuesday, creating upward momentum towards the upper band of the Bollinger Bands. Currently, the price is slightly below the upper band, suggesting the possibility of further upward movement today that could potentially breach the upper band. The Relative Strength Index (RSI) is currently at 69, indicating a potential bullish movement for XAU/USD.

Resistance: $1,946, $1,954

Support: $1,929, $1,920

Economic Data