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Chart Advisor: Don’t Panic…Yet

Posted September 14, 2023 at 7:48 am

By Gordon Scott, CMT

1/ CPI Heats Up

2/ Muted Market Reaction

3/ Dollar Maintains Strength

4/ Importers Notch Gains

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1/ CPI Heats Up

The inflation numbers reported on Wednesday came in higher than expected. Analysts had expected the Consumer Price Index (CPI) report to show inflation rising at an annual rate of 3.6%, but the data came in at 3.7%.

Largely driven by rising oil prices, a 3.7% inflation rate isn’t the worst thing that could happen to an economy, but it does represent a problem for investors to ponder. Namely, will this data point cause the Federal Open Market Committee (FOMC) to raise interest rates both next week, and again at its next meeting. 

Investors had largely been settled on the opinion that this meeting might feature a quarter-point rise, but that it would likely be the last one for the foreseeable future. If inflation is not under control, perhaps the FOMC will continue its work of raising rates, endangering the gains made by the market so far in 2023.

2/ Muted Market Reaction

If the slight miss on the CPI number worried investors, they didn’t show it. During the minutes immediately following the report, the U.S. Dollar Index Futures (DX) showed substantial fluctuation. The fluctuation repeated itself to a lesser degree when the New York Stock Exchange (NYSE) opened. 

The chart below shows 5-minute candlesticks and points out where the report was published and where the market opened.

What is notable is that the price action stayed within the range of the initial fluctuation for the rest of the day, neither rising nor declining significantly. It is likely the market will wait for tomorrow’s Producer Price Index (PPI) report to confirm the data that inflation is on the rise. 

But either way, this reaction means that most investors don’t want to sell out of their stock positions if they don’t have to. That attitude is more likely to coincide with a bullish market in the days ahead.

3/ Dollar Maintains Strength

In anticipation of slightly higher interest rates, the U.S. Dollar Index (DXY) has continued its upward trend since the middle of July. The fact that the greenback has gained ground against other currencies is a much more significant development than a slight rise in the rate of inflation. This drives the dollar to  relative strength in the chart below compared to Invesco’s CurrencyShares ETFs for Euro (FXE), Australian Dollar (FXA), and Japanese Yen (FXY). 

This chart shows that when the U.S. Dollar is on the rise, these currencies will decline in relative value. The negative correlation to the dollar also means that exporters will find their goods and services becoming more attractive to the U.S. consumer. Companies which benefit from importing goods to the U.S. might find current conditions favorable to their business.

4/ Importers Notch Gains

Two stocks in particular seem to have caught the attention of investors over the last few days and weeks. Amazon (AMZN) and Walmart (WMT) have both shown a steady climb higher even while other stocks have been falling (see chart below).

The price action for both of these stocks is notably correlated to the price action for the US Dollar vs. the Chinese Yuan (CNY). With the dollar trending higher against yuan, goods imported from China become less expensive for the U.S. consumer, so it’s not surprising that companies which import goods from China would benefit.

Originally posted 14th September 2023

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