US Inflation Declines Increasing the Market’s Risk Appetite

US inflation declines from 4% to 3%, while the Core Inflation data drop from 5.3% to 4.8%. US inflation has cooled for the 12th consecutive month and is at its lowest since March 2021. As a result, economists and investors are pricing changes to the monetary policy differently. Previously markets expected the Federal Reserve to increase the Federal Fund Rate by 0.50% through two separate hikes. However, as inflation edges closer to the Fed’s target, markets now believe the regulator will not hike more than 0.25%, while others believe the Fed will abandon further hikes.  Most analysts believe the Fed will hike in July before pausing for the rest of 2023.

Due to the new market pricing, the US Dollar Index declined to 100.00 before retracing upwards and settling at 100.40. The US Dollar experienced its most substantial decline against the Japanese Yen, reducing by 1.28%, and the Swiss Franc fell by 1.34%. This week's best-performing currency is the Swiss Franc, which is climbing against all major currencies. Furthermore, the stock market has risen significantly in Europe and the US. This is in response to more favorable consumer pricing and a potentially weaker monetary policy. Of the world’s top 10 indices, the CAC performed best, rising by 1.60% within a single trading session. 

Though, investors should note that most economists are advising inflation will become more challenging to tackle in the coming months. Economists stated inflation will be difficult to bring down to 2% quickly while employment remains high and oil prices significantly rise. In the past two days, the price of Crude Oil increased by 3.54% and has grown to its highest level since April. The price increases will likely show in August’s Consumer Price Index. Nonetheless, US Senator, Elizabeth Warren, calls on the Federal Reserve to end further hikes. 

Dow Jones

The price of the Dow Jones rose by 1.04% before retracing and ending the day 0.40% higher. The Dow Jones was the worst-performing US index but still witnessed significant bullish price movement. Though, as previously mentioned during yesterday’s resistance level, the price may find resistance at $34,475, which can form a psychological level for traders. This morning, European indices are slightly lower, but both US and Asian stocks are again higher this morning.

Dow Jones 20-Minute Chart on July 13th

As mentioned above, the bullish price movement is being influenced by lower-than-expected inflation. As a result, the Fed is likely to abandon the planned second hike or even consider a pause from July. However, analysts believe the Fed will still hike in July as they previously said they would not be data dependent. Investors are also pricing in a pivot in 2024 which is positive for the stock market in the longer term.  Madison Faller from JP Morgan advised the inflation print gives a reasonable likelihood of a positive second half of the year after an excellent first half.

Though a threat to the stock market continues to be the current risk of recession, the recession risk remains relatively low. Still, data is deteriorating in certain regions, which is a concern. For example, the UK economy shrunk by -0.1%, and China's exports saw their most significant decline in more than three years. Chinese exports have now read lower for two consecutive months and are deemed to indicate economic growth due to being the world’s largest exporter. If recession risks rise and is realised by investors, the demand for risk-based assets, such as stocks, can decline.

USD/JPY

The exchange rate has declined for the third consecutive day and has shaved off 2.73% of its value. Additionally, this is one of the most substantial declines since January 2023. The advantage of the USD/JPY is investors can take advantage of the depreciating Dollar, purchase the Yen at a lower price and the Yen’s Safe-Haven characteristics. 

The exchange rate has broken through previous support levels and is below the 38.2 level of the Fibonacci retracements indicators. Both indicate further bearish price movement with a possible target of 137.377 and 135.557. The regression channel continues pointing downwards with the price trading below, and the RSI is also priced at 38.00, indicating sellers have control of the price movement. Trend and momentum-based indicators also continue to point towards the price continuing a decline in the medium term. However, traders should be cautious of a change in order flow and can also use the Depth of the Market to determine if buyers and waiting to enter at a lower price. 

USD/JPY 6-Hour Chart on July 13th 

Investors will be turning their attention to this afternoon’s Producer Price Index. Analysts expect the monthly PPI to read 0.2%, higher than the previous month. If the data read lower, the price of the Dollar may be further pressured while the stock may experience an increase in demand. Lower PPI data again will point towards a weaker monetary policy and increase the possibility of a pause. On the other hand, higher PPI data can support the Dollar in the short term.

Summary:

• US inflation declines from 4% to 3%, while the Core Inflation data drop from 5.3% to 4.8%. US inflation has cooled for the 12th consecutive month and is at its lowest since March 2021. 
• Investors are now contemplating if the Federal Reserve will still hike in July and how likely a pivot is in early 2024.
• The US Dollar declines, and global equities rise. Of the world’s top 10 indices, the CAC performed best, rising by 1.60% within a single trading session. 
• The best-performing currency this week continues to be the Japanese Yen. This week the USD/JPY declined by 2.73%. Technical analysis points towards the USD/JPY declining further, but investors also turn their attention to today’s PPI release.