Dollar Tumbles As Core Inflation Cools

The busiest day in terms of scheduled economic data also proved to be the biggest fundamental let down. Indicators for consumer-level inflation, New York regional factory activity and international capital flows all printed near their respective consensuses. However, the pent up pressure ahead of the wall of event risk and technical levels demanded a move; and the deceleration in the core price gauge was happy to oblige.

Leading the breakout well after the data crossed the wires, EURUSD broke its 40 point morning range on a 60-point rally that carried the pair above 1.3600. Quick to catch up on the move, dollar selling spread to GBPUSD sending the pair on a 95-point run to test major resistance around 1.9850. It took only 15 minutes for USDCHF to drop 65 points and take the pressure off of the ceiling of a week old range. Finally, USDJPY has put another test in on its congestion levels, following yet another turn lower around 120.50.
Though there were a number of top-rated market movers on the docket Tuesday morning in the US session, each had little effect on the dollar when first hitting the wires. Without a doubt, the most highly anticipated release for the day was the Labor Department?s Consumer Price Index. The third and final inflation number in the monthly series, April CPI was well served by the Import and Producer prints. The consumer-level gauge made few waves with its headline numbers. The most comprehensive measurement reported a 0.4 percent increase last month, helping to cool the annual figure from a 2.8 percent clip to 2.6 percent as expected. At the same time, the core number - excluding the effects of volatile components like fuel - provided a little more surprise. A modest 0.2 percent rise in the monthly measure helped dampen the annual figure to a yearly low 2.3 percent. So, while the data on whole was in line with the market consensus, the data certainly added to the long-term, bearish tone surrounding the dollar. Inflation is the last stronghold for rate hawks struggling to at least keep rates unchanged. If the Fed takes weight of the steady downtrend in core inflation, the rate cut that futures are pricing in for the end of the year may come sooner rather than later.
After the CPI was broken down and fully processed, the market moved on to the other economic offerings for the session. The Empire Manufacturing Survey for May hit the wires at the same time the inflation data crossed. For short-term traders, the indicator was a wash as it printed exactly in line with expectations. Aside from the market?s hunger for a divergence from the consensus, though, the gauge bodes well for the economy. On the heels of the sharp rebound in the April ISM manufacturing report, strong performances from the timelier regional factory reads support forecasts for a strong turn in the overall sector. In the months ahead, the performance of the manufacturing sector will be increasingly important in contrast to the housing market and overall growth. Moving along, even the historically volatile TICS report didn?t stray to far from expectations. For March, there was a net $67.6 billion inflow of capital into the US evenly spread over Treasury, equity and debt purchases. Moving to the outlook for tomorrow, the data scheduled for release is heavily concentrated on the housing market. Projections are officially calling for declines, but better results could help revive growth and open up dollar bids since the currency is clearly pinned under bearish sentiment.
Equities were set for a strong morning even before the exchange floors opened for trading. Armed with mild macro data that largely supported growth, it didn?t take long for the indices to take off into record territory. By 15:00 GMT, the Dow was putting up the biggest numbers in a 0.63 percent rally to 13,430.65. Following its lead, the S&P 500 rose 0.4 percent to 1,509.11 while the NASDAQ Composite advanced a modest 0.09 percent to 2,548.80. While the gains in the equities markets were pretty evenly spread, outsized moves were still recorded. The most actively traded stock on the NYSE, Ingersoll Rand, also saw a considerable 6.7 percent rally to $49.73 after investors caught wind of a doubling of the firms stock buyback plan and discussion of a possible spinoff of its Bobcat line. For a deal update, Reuters officially backed a $17.2 billion offer from Thompson Corp. Reuters shares responded with a 3.8 percent or $2.74 rise to $74.36.
The lack of surprises from the economic calendar did little for the Treasuries market or the bias for a possible rate cut by the end of the year. At 15:00 GMT, the ten-year note was unchanged at 98-15 with its yield stable at 4.692. The thirty-year bond was similarly unchanged at 98-05 as its yield hovered at 4.866.