S&P 500 Jumps, Yields Drop as Odds of an Interest Rate Cut Increase After PCE

Also 30-year T-bond, gold, crude oil and Japanese yen futures

1. S&P 500 E-mini futures (/ES): +0.30%
2. 30-year T-bond futures (/ZB): +0.24%
3. Gold futures (/GC): +0.70%
4. Crude oil futures (/CL): +0.09%
5. Japanese yen futures (/6J): +0.59%

U.S. equity futures and bonds rose, the U.S. dollar fell and commodities were mixed after this morning’s inflation report out of the United States bolstered bets that the Federal Reserve will be able to cut rates in June. The Fed’s preferred gauge of inflation rose 2.4% year over year (y/y)on the headline and at 2.8% y/y on the core, in line with expectations and potentially curbing growing fear that markets were underestimating price pressures, a narrative that began to take shape after the release of the January U.S. consumer price index (CPI) report.

This morning’s inflation data gave equity traders the green light to buy, with S&P 500 futures (/ESH4) rising about 0.3% ahead of the opening bell. After the personal consumption expenditures price (PCE) data met expectations, the chances for a June cut became clearer to market participants, who until this morning remained on the sidelines. Still, the index has to clear record levels traded last week at 5,123.50.

Bonds trimmed earlier losses and headed higher after this morning’s inflation report increased the odds for the Federal Reserve to cut interest rates in the first half of the year. Four- and eight-week bills are scheduled for auctions today, and then traders still have more economic data to mull, with Institute of Supply Management (ISM) manufacturing data due tomorrow, along with consumer sentiment data.

Gold prices (/GCJ4) got a jolt from the shift in rate cut expectations, which aided the non-interest-bearing asset’s outlook. Prices rose 0.7% to the highest since early February, as a softer dollar and lower yields cleared upside for the metal. On a continuous contract basis, /GC rose above its 50-day simple moving average, although the metal faces several technical hurdles before it could challenge recent all-time highs.

Typically, a dovish recalibration in Fed bets helps oil prices, but that wasn’t the case this morning. Crude oil futures (/CLH4) pulled back today after challenging highs from January. Oil bulls hit a road bump with inventory data from the Energy Information Administration (EIA) posted yesterday, which showed a larger-than-expected build in crude oil stocks. However, fuels, on net, decreased more than expected, which could translate to smaller-than-expected crude builds over the next several weeks as refiners increase throughput.

Bank of Japan (BoJ) member Hajime Takata delivered a hawkish speech that included suggestions that the BoJ has its inflation target in sight. That increased bets for a possible March hike, and combined with this morning’s U.S. inflation data, which increased chances for a June cut, the yen got a clear signal to move higher. While its usually an unfruitful endeavor to pick bottoms, traders may see this as the turning point for the Japanese currency.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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