The Daily Fix – Fed cuts are coming, rotate away

• US CPI review

• A September Fed rate cut is a lock

• The USD follows US 2yr yields but it’s the JPY that stole the show

• Gold eyeing a test of the ATHs

• US equity moves - A monster switch from tech to value

• Asia opening calls – the ASX200 to open at a new ATH

It’s been a big day in the trenches for traders and we’ve seen some punchy intraday moves, all-time highs coming into play, but also sizeable reversals seen in some of the very extended/over-loved positions.

US CPI was always the marquee risk this week, and it was the landmine that traders really needed to be set in front of their screens to react to. Headline CPI fell -0.1% m/m - the first decline since mid-2020. More importantly, we saw US core CPI coming in at 0.06% m/m (3.3% y/y), below expectations, with core services pulling back to 0.13% driven by a big decline in airfares, and a further moderation in shelter.

We watch for the US PPI inflation report in the session ahead, which will galvanize our conviction on forecasting the US core PCE inflation read (due 26 July), which the Fed set policy to.

The reaction in the bond market to the CPI print was straightforward, with the yield on the US 2yr Treasury yield falling from 4.63% to 4.48% before better supply was seen, and we see yields ultimately closing out -11bp to 4.51% on the day. The US 10yr Treasury closed -7bp, so a less pronounced move and we’ve seen curves bull steepen a touch. US rates markets now price a full 25bp cut by September, so its game on for easing to start in September in the eyes of the market. We can also see 60bp of cuts priced for the December meeting, so the debate is now whether we see two or three 25bp cuts by year-end.

For the first time in a while, the market will listen closely to speeches from Fed officials, as they will want to hear clearer signs that the Fed is looking to open the door to easing, with increased confidence to start the cycle.

USDJPY and the JPY crosses were the focal points in FX markets, with USDJPY rates smashed 417 pips post-CPI, in a move which smells very much like an intervention – it appears the MoF and BoJ may have turned momentum trader, grabbing their moment to hit the market when it was at its most vulnerable. Comments from key Japanese currency officials may be heard through the session ahead, but one can imagine they will be purposely vague.

AUDUSD saw good flow, with the pair trading higher into 0.6799 before fading back to the flatline following a reversal lower in the S&P500 futures – EURUSD kissed the 1.0900 level before sellers found form.

Gold saw big flows, with the yellow metal trading $2380 to a high of $2424 before consolidating – the bulls are now gunning for $2431 (the 12 April spike high) and more so the ATH of $2450 – there’s a bit of wood to chop to get there, and we’ll need to see the DXY break 104 and US real rates pull lower, but the wind is to its back.

Possible intervention aside, the moves in US equity markets were prolific. The initial euphoria to the US CPI print saw NAS100 futures rally 0.5% off the bat with the index falling just shy of 21k - S&P500 futures also rallied 0.5%, breaching 5700. What happened next caught many by surprise and forced the day traders to react dynamically to the change in price action.

When cash equities opened, funds moved aggressively out of growth, AI-related plays and big tech and moved into value areas of the market and small caps – we did see some individual stock news, such as Tesla delaying the unveiling of its robotaxi until October, but the broad move was driven by rotation and switching across styles and factors.  

Tesla closed -8.4% with 218m shares traded – a solid flush. The MAG7 index closed -4.4%, and we can see within the S&P500 sectors that REITS, utilities, materials, and industrials all worked well. Breadth was quite upbeat, with 79% of S&P500 stocks closing higher, but it was the well-loved names that saw the selling and maybe this was partly technical given just how extended these plays are. Volumes through the S&P500 and NAS100 were 13.3% and 8.4% respectively above the 30-day average.

The Russell 2000 was the play of the day, with the small-cap index closing up 3.6% and just shy of the 28 March high of 2135 – the small-cap index is still 13% off the ATH that it reached on November 2021, but that gap may be closing in this run. In fact, we saw a 5.6% outperformance of the Russell 2k vs the NAS100, the third biggest outperformance ever.

NAS100 / Russell 2K ratio + 1 day % performance

We’ve seen rotation play out quite a bit of late, but we certainly haven’t it this pronounced – the rotation moves also haven’t lasted more than a one- or two-day affair, so we’ll see if this switch has legs and whether we do see a period of underperformance from tech.

Turning to Asia, our calls for the NKY225 look dicey and this index is another over-loved play that is getting a working over by the sellers – naturally, the moves in the JPY are also a major factor here. The big development is that we should see a new ATH for the ASX200 on open and again when value areas of the market fire up then the ASX200 is one index where global capital will seek out – so the challenge for the bulls today is to hold the index above 7910 (the former high printed on 2 April). Banks should fire up on open, as should material names although BHP’s ADR suggest the miner opens a touch lower.

All this said, today is a new day and the market may see things differently after this position flush – still it is clear the market feels the Fed now have the evidence it needs – growth is moderating, as is inflation and investors can reweight positions with greater conviction towards areas of the market that typically work in a late-cycle environment.