A strong retail sales report from the US has led to a fall in Wall Street indices, an increase in US bond yields, and a slight gain for the dollar in the first half of the day, but ultimately closing the day at a similar level. The market was again adjusting its overly optimistic pricing of interest rate cuts by major central banks. The pound gained after the inflation report. Gold fell to around 2005 USD and was the cheapest in over a month.
Currently, Fed Fund Futures contracts are pricing in a 55% chance of a 25 basis point rate cut in March. This is significantly less than last Friday, for example, when the probability was close to 80%. By the end of 2024, the market currently assumes a reduction of almost 140 bp, a few days ago it was almost 170 bp. This change is due in part to statements made by Fed representatives. Hawkish comments dominate. While the market has not received any new information, over time, policymakers are increasingly communicating that the market is wrong in its assessment of further central bank actions.
The strong retail sales report pointed to continued solid dynamism in the US economy at the end of 2023. The December figure showed a growth of 0.6% month on month. The Bloomberg consensus was 0.4%. The previous figure was 0.3%. The result without cars (0.4%) was also higher than expected and sales without cars and fuels amounted to 0.6%.
Yesterday, the data significantly affected US debt yields. The 2-year yield increased by 14 bp to 4.36%, and the 10-year yield by 4 bp to 4.1%. On the currency market, the USD appreciation was noticeable, but it was smaller than on Tuesday. The EUR/USD rate set new local lows just below 1.0850. This morning, quotes were again temporarily above 1.09 but at the time of writing this review, the rate is just below the aforementioned level.
The chart patterns of Wall Street stock indices suggest a slightly larger correction. Dow Jones has drawn a pattern reminiscent of a “head and shoulders”. In this case, the potential neckline has already been breached. Drops to at least the level of the previous all-time high (set in January 2022) seem highly likely. Perhaps it is time for a correction of this November-December rally of the “bulls”. The double top visible on the DAX index chart suggests that the correction has not yet had its final say and may be deepened. Horizontal support has already been broken and thus technically open is the way to the 16 140 point level. In this area, the internal Fibo 38.2% retrace and also the September 2023 peak run.
Returning again to the currency market, it is worth noting yesterday’s strengthening of the British pound, which resulted from higher inflation readings. The above-expected CPI figure surprised the markets and caused the GBP/USD pair to approach the 1.27 level yesterday, ultimately reaching it this morning. The publication may have reminded the market that there is still a risk to inflation and that the fight against it has not ended.
Łukasz Zembik Oanda TMS Brokers.
