NY Open: 'Oh, what a relief it is'

“Plop, plop, fizz, fizz, oh, what a relief it is” – with this jingle, Alka-Seltzer promised relief from heartburn. Tame inflation data did the same thing for Wall Street traders today, at least initially. The day is still young.

Core CPI data came in at 2.2% year-on-year, a tick below the 2.3% that was widely expected. This morning’s data went a long way towards alleviating concerns that rapidly rising inflation rates would force the Federal Reserve to speed up the pace of interest rate hikes. A dip in US 10-year Treasury yields from 3.195% pre-CPI to 3.162% post-CPI helped. Wall Street reversed opening losses, and the three major indices are in positive territory as of 14:00 GMT.

The equity market meltdown was overdue. Prices had rallied relentlessly since July without any meaningful pullbacks. Traders turned a blind eye to escalating US/China trade tensions, hawkish-sounding comments from Fed officials, and soaring oil prices. They spooked themselves during a period devoid of top-tier actionable US economic reports, sparking a much-needed correction. The Dow Jones Industrial Average uptrend from April is still intact while prices are above 25,000.

The inflation data appeared to be a letdown for FX markets. There was the usual noise after the release, but markets quickly settled down. AUDUSD and NZDUSD outperformed, rising 0.39% since the New York open. The rest of the G-10 majors are flat to slightly higher except for the Japanese yen, which is lower.

EURUSD continues to rally after bouncing off of major support in the 1.1440 area on Tuesday. The uptrend is intact while prices are above 1.1550, with a break above 1.1620 targeting further gains to 1.1720.

The rally may be more of a short squeeze rather than the onset of a new trend. For starters, US rates are still going higher while the European Central Bank is on hold until the summer of 2020. Also, Italy continues to defy the EU with its budget deficit plans. If Rome gets away with it, what other capitals might try the same thing?