As I analyse the financial markets today, significant shifts are happening. The US dollar is experiencing a downturn, and Nvidia, which showed upward momentum yesterday, is now down by more than 18%. This volatility underscores the unpredictable nature of the market this week.
I anticipated that this week would be slow, leading into Thursday and Friday. Despite the market's recent movements, the reasons behind these fluctuations were unclear. Today, however, I have the answers. The US is seeing a reduction in inflation, which is favorable for the economy but not for the US dollar or most stocks.
The latest inflation data release is crucial. The core CPI and overall CPI figures provide insight into the economic landscape. Yesterday's data indicated a decline, with the CPI dropping by 2.1% on a seasonally adjusted basis after being unchanged in May. Over the past 12 months, the overall item index increased by 3% before seasonal adjustment, while the gasoline index fell by 3.8% in June after a 3.6% decline in May. The index for all items excluding food and energy grew by 0.1% in June, following a 0.2% rise in the preceding month.
This data suggests that the Federal Reserve's measures are beginning to take effect. The inflation trajectory shows a downward curve, which aligns with the Fed's objectives. Given this, it is likely that we will see two rate cuts from the Fed this year. This expectation is driving market sentiment and contributing to the US dollar's weakness.
In response to the CPI data, the US dollar experienced a significant drop shortly after the release, losing more than 1% in less than two minutes. This reaction reflects the market's anticipation and the built-up expectations regarding the CPI and core CPI figures. However, the overall decline in CPI and the subsequent market reaction highlight the complex dynamics at play. The Federal Reserve now has the data it needs to justify potential rate cuts, leading to a bearish outlook for the US dollar. This shift could result in a stronger euro and potentially a bullish trend for the Japanese yen.
Looking ahead, tonight's release of the Producer Price Index (PPI) will be critical. This data will indicate whether the deflationary trend observed in consumer prices is also present at the producer level. If the PPI data aligns with the CPI, it could confirm a broader deflationary trend, further influencing the Fed's policy decisions.
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