Dow Surges on Inflation Relief, Tech Stocks Rally; RBA's Rate Hike and Gold's Resilience in Focus | Daily Market Analysis

Key events:

• Japan – GDP (QoQ) (Q3) 
• UK – CPI (YoY) (Oct)
• USA – Core Retail Sales (MoM) (Oct)
• USA – PPI (MoM) (Oct)  
• USA – Retail Sales (MoM) (Oct)
• USA – Crude Oil Inventories

On Tuesday, the Dow Jones Industrial Average experienced an uptick, closing higher by 489 points or 1.4%. This positive momentum extended to the broader market, with the S&P 500 up by 1.9% and the NASDAQ Composite recording a substantial gain of 2.4%. The catalyst for this surge was a decline in Treasury yields, creating favorable conditions for technology stocks to accumulate gains.

This shift was prompted by a milder-than-anticipated inflation report, reinforcing investor beliefs that the Federal Reserve's series of interest rate hikes has concluded.

The consumer price index for October revealed a slower growth rate, coming in at 0% compared to the previous month's 0.4%, surpassing economists' expectations for a 0.1% reading. The unexpectedly subdued inflation data fueled speculation that the Federal Reserve is unlikely to implement further interest rate increases. Morgan Stanley, in a note, emphasized that soft inflation and persistently tight financial conditions would likely keep the Federal Reserve's interest rates stable.

As a result of this outlook, traders are now anticipating that the Fed will maintain the current interest rates and potentially initiate a rate cut in May. The reaction to the inflation report was evident in the sharp decline of Treasury yields. The yield on the 2-year Treasury plummeted by 21 basis points to 4.832%, while the 10-year Treasury yield dropped by 18 basis points to 4.455%.

Tech stocks, particularly those in the big tech sector, benefited from the market sentiment supported by the dip in Treasury yields. Alphabet (GOOGL) and Meta Platforms (META) led the way in this upward trajectory. Additionally, chip stocks saw a more than 3% increase, with notable contributions from Globalfoundries Inc (GFS), Novanta Inc (NOVT), and Marvell Technology Inc (MRVL), the latter receiving a boost from positive remarks on Wall Street.

Home Depot (HD) experienced a notable rise of over 5% following the release of its Q3 results, which exceeded Wall Street estimates.

The retailer reported a smaller-than-anticipated 3.1% decline in third-quarter comparable sales, attributed to customers undertaking more modest projects and home repairs. Home Depot also adjusted its full-year outlook, now anticipating sales to fall by 3% to 4%, a narrower range compared to the previous expectation of a 2% to 5% decline.

In Australia, indications are emerging that the labor market, which has been performing strongly, may have reached its peak. The Unemployment Rate is anticipated to have experienced a slight increase in October, although it is expected to remain near historically low levels. The Reserve Bank of Australia (RBA) responded to this economic landscape last week by implementing a 25 basis points increase in its key interest rate, breaking a streak of four consecutive pauses. This decision aimed to instill greater confidence that inflation would return to the target range within a reasonable timeframe. Despite acknowledging a softening in labor market conditions, the RBA noted that they still remain tight.

The upcoming jobs report carries significant weight, as any notable negative change in employment could solidify market expectations that the RBA will refrain from further interest rate hikes in upcoming meetings and may even prompt discussions about potential rate cuts.

The Australian Dollar to US Dollar pair experienced a sharp rise on Tuesday, fueled by the release of the US Consumer Price Index report. This rally propelled the pair above the 0.6450 resistance level, reaching levels beyond 0.6500. As the pair hovers around these levels, there is a possibility of testing the crucial 0.6520 resistance area. A daily close above this level would indicate potential for further gains, suggesting a more sustainable recovery for the AUD/USD pair.

Turning to the precious metals market, gold prices have seen buying interest for the third consecutive day. The precious metal is maintaining modest gains around the $1,967-1,968 range, just below the weekly high achieved on Tuesday. Gold is finding support from a weaker US Dollar, influenced by a growing consensus that the Federal Reserve has concluded its interest rate hikes.

Despite the positive sentiment surrounding gold, an optimistic market mood, driven by dovish Fed expectations and a substantial liquidity injection by China’s central bank, could potentially limit gains for the safe-haven asset.

Additionally, caution is warranted due to signs suggesting a potential easing of tensions in the Middle East, which may influence the trajectory of gold prices following this week's rebound from the lowest level since October 18, around the $1,930 area touched on Monday.