U.S. economic reports cause turmoil - Market Overview

U.S. economic reports cause turmoil -  Market Overview

The inflation figures published yesterday in the United States experienced a slight rebound that was not enough to raise inflationary expectations in the market.

On the contrary, this led to investors leaving behind strong inflation fears and react by undoing defensive positions.

CPI reports

For March, the interannual CPI rose only 0.1% compared to the forecast - 2.6% vs 2.5%. Still, the result was well above the figure for the previous month -1.7%. Core CPI also increased by 0.1%, 1.6% vs 1.5% expected and higher than the previous month - 1.3%.

In reality, what happened in the market is that expectations were higher. Investors feared that it would carry over to consumer prices after the significant increase in the PPI figure. The rise in PPI was mainly due to increases in international trade costs affected by various events interrupting the supply chain's proper functioning. Still, these costs have not been transmitted in proportion to consumer prices.

With all this, it is still possible that these consumer prices may rise in the near future due to higher production and transport costs and the increase in the price of commodities. Above all, an increase in the figures of consumption that could be boosted by the economy's opening and the governments' enormous fiscal stimulus can also have an impact.

But the immediate reaction of the market yesterday has been to lighten positions that anticipate an inflationary situation. Such a move led to American treasury bonds purchases, and the 10-year reference yield fell nine bps, reaching 1.63%.

How did the U.S. Dollar react?

The U.S. dollar, which is highly positively correlated with Treasury yields, also weakened considerably. Compared to the euro, it surpassed the resistance levels of 1.1930, reaching the 1.1970 zone. EUR/USD, therefore, corrects upwards and is approaching the main resistance located around 1.1990 above which the current bearish movement would be ended from a technical perspective.

Everything could depend on whether the downward movement of U.S. bond yields continues or not. Also, the ECB’s decision regarding their willingness to maintain and even increase their asset purchase program in case it is necessary could have a crucial role. Meanwhile, the pair remains neutral without a clear medium-term trend.

The stock markets have also lost momentum. Although they continue to advance, they do so in a very limited way, showing a lack of conviction on investors' part regarding the economic outlook.

The behaviour of Copper is interesting in this sense. This commodity has a high positive correlation with the North American indices, and, as we can see in the graph, it is within a triangle that has not yet been resolved. In principle, this could be a bullish continuation pattern.

If a break to the upside is confirmed, the next target could be the previous high at 4.3585. A movement like this should coincide with better expectations about the economy, and therefore, if the correlations are maintained, it would drag the indices higher.

Sources: reuters.com, investing.com.

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