Market Recap

The release of the US June Consumer Price Index (CPI) last night came with an upside surprise, with the headline figure surging way past expectations at a 9.1% increase year-on-year (YoY) (8.8% consensus). This marks its highest rate in nearly 41 years. The core aspects of inflation also brought little relief, coming in higher-than-expected at 5.9% (5.7% consensus). After the release, the muted reaction in US breakeven rates suggests that market participants remain confident that the Fed will be able to keep inflation under control, but will come at the expense of more aggressive rate hikes. This is reflected in the Fed Funds futures, which are currently pricing for a 54% chance of a 100 basis-point (bp) hike in the July Federal Open Market Committee (FOMC) meeting - a sharp adjustment from the pricing for 75 bp at the start of the week. The Bank of Canada (BoC) has already moved ahead with a 100 bp yesterday, suggesting the need for a more aggressive front-loading to tame inflation.

Increased recession risks in the near-term as a trade-off for more aggressive tightening could remain at the forefront of sentiments, as the initial rise in US Treasury yields were eventually pared back after an initial rise. The yield-curve inversion between the two-year and 10-year Treasuries widens further to its biggest level since 2000. That will bring focus to the upcoming major US banks’ earnings as another key risk event to watch, with results from JPMorgan and Morgan Stanley later tonight being scrutinised for clues on economic conditions and outlook.

The S&P 500 continues to hover around the 3,800 region, where a confluence of Fibonacci retracement levels stands. A near-term double-top pattern seems to be in place as well, with buyers seeking to defend its neckline overnight. This may leave any potential break below 3,740 on watch, which could drive further downside to the 3,630 level next.

Asia Open

Asian stocks look set for a mixed open, with Nikkei -0.18%, ASX +0.10% and KOSPI -0.43% at the time of writing. The Asia session could leave market participants to digest the upside surprise in US June inflation, with expectations of a more aggressive tightening translating to higher recession risks. Some signs of resilience continue to be presented in the US-listed Chinese equities, with the Nasdaq Golden Dragon China Index closing in positive territory at a 1.3% gain overnight.

The advance estimate for Singapore’s quarter two (Q2) gross domestic product (GDP) came in below-than-expected at a 4.8% growth YoY (consensus 5.2%). Some resilience continues to be presented in the manufacturing sector (8% YoY), along with a 4.7% growth in services on economic reopening. However, growth may be lukewarm in moderation with economic conditions across the globe. Guidance from Money Authority of Singapore (MAS) suggests that GDP growth is projected to come in at lower half of 3-5% forecast range for 2022, while headline CPI forecast is revised higher to 5.0-6.0%, up from previous 4.5-5.5%. The upward revision came after the higher-than-expected US CPI data print last night, which could justify the off-cycle raising in policy band by the MAS this morning. The slope and width of the band remains unchanged. This marks the second off-cycle tightening from the MAS, following through with the urgent need to tame inflation before the official October meeting.

The USD/SGD is currently retesting a key 1.396 level, which marks a confluence of a near-term upward trendline and a previous resistance-turned-support. While the surprise tightening of the MAS has driven a knee-jerk reaction in the SGD to the upside, a break below this level may need to be warranted in order to bring further downside for the USD/SGD pair to the 1.384 level next.

On another note, last week’s SGX fund flow data suggests that net institutional fund outflows took a pause and while on the technical front, the STI is attempting to move above its descending channel pattern, gains were quickly overcome yesterday, which points to the strong presence of sellers. The hot US inflation print may likely drive a cautious mood today as well, as the STI could risk the formation of another lower high ahead.

On the watchlist: Dip buyers seek to defend US$1,724 level for gold prices

Ramping rate hike bets coming after the release of US June CPI have driven a knee-jerk downside reaction for gold prices before a weaker US dollar and retreating Treasury yields eventually aid to underpin prices. That led to a formation of a bullish pin bar overnight, as dip buyers seek to defend its US$1,724 support level. That said, while the oversold technical condition on the relative strength index (RSI) may aid to provide a reprieve for the yellow metal after falling as much as 6% over the past two weeks, the prospects of aggressive rate hikes could remain as a headwind to place a cap on eventual upside. Near-term resistance to overcome may be at the US$1,770 level, where a 76.4% Fibonacci retracement rests alongside a previous support-turned-resistance.

Wednesday: DJIA -0.67%; S&P 500 -0.45%; Nasdaq -0.15%, DAX -1.16%, FTSE -0.74%