NASDAQ Hits Record Highs Despite Inflation Concerns: Powell's Reassurances Boost Market Sentiment | Daily Market Analysis

Key events:

• USA - Core CPI (MoM) (Apr)
• USA - Core Retail Sales (MoM) (Apr)
• USA - CPI (YoY) (Apr)
• USA - CPI (MoM) (Apr)
• USA - Retail Sales (MoM) (Apr)
• USA - Crude Oil Inventories

Tuesday saw the Nasdaq soaring to new heights, disregarding concerns raised by a higher-than-expected inflation report, as Federal Reserve Chairman Jerome Powell reassured that the existing interest rate levels are effectively curbing inflation.

Closing at an all-time high of 16,511.18, the NASDAQ Composite surged by 0.8%. The Dow Jones Industrial Average followed suit, climbing 126 points, equivalent to a 0.3% increase, while the S&P 500 registered a 0.4% rise.

In April, US producer prices experienced a swifter-than-anticipated growth rate of 0.5% every month, primarily driven by heightened costs across services and goods sectors. This acceleration underscores persistent inflationary pressures at the outset of the second quarter, outpacing economists' forecasts of a 0.3% increase. Compared to March's revised contraction of 0.1% month-on-month, this represents a notable uptick.

Over the twelve months leading to April, the producer price index for final demand rose by the anticipated 2.2%, marking the most significant increase since April 2023's surge of 2.3%. The figure for the previous month underwent a downward revision to 1.8%.

Commenting on the PPI data, Morgan Stanley remarked in a note that the current figures still surpass the threshold indicative of inflation moving in a favorable direction.

With the consumer price index set for release on Wednesday, these developments follow a trend of persistent inflation throughout the first quarter, quashing hopes for early interest rate cuts this year.

Several Federal Reserve officials have cautioned in recent weeks against prematurely initiating rate cuts, stressing the necessity for greater confidence in inflation's trajectory toward the central bank's 2% annual target.

Despite the lower-than-expected Wage Price Index (Q1) released by the Australian Bureau of Statistics on Wednesday, the Australian Dollar remains resilient, buoyed by positive sentiment and improved risk appetite.

In terms of fiscal policy, the Australian Budget for 2024-25 has shifted back to a deficit after a surplus of $9.3 billion in the previous fiscal year. The Australian government aims to address headline inflation and alleviate cost-of-living pressures by allocating significant funds to reduce energy bills and rent, along with initiatives to lower income taxes.

Meanwhile, the EUR/USD pair exhibits a bullish bias around 1.0815 during the early Asian trading hours on Wednesday. Market sentiment might turn cautious later in the day ahead of key economic data releases from both the Eurozone and the US, particularly the first reading of the Eurozone Gross Domestic Product for the first quarter.

Federal Reserve Chairman Jerome Powell's remarks on Tuesday emphasized that inflation is declining at a slower pace than expected. The PPI data further supported the argument for maintaining higher interest rates for a longer period. Powell indicated that additional rate hikes are unlikely, even as the probability of rate cuts diminishes. Additionally, Kansas City Fed President Jeffrey Schmid underscored that inflation remains elevated, suggesting more action from the US central bank is necessary.

Looking ahead, the US CPI data due later in the day could impact the Fed's interest rate decision in the upcoming meeting. Analysts expect the annual headline CPI inflation to ease to 3.4% in April from the previous reading of 3.5%, while the Core CPI inflation is projected to drop to 3.6% from 3.8%. Meeting these expectations could revive prospects for rate cuts, potentially weighing on the US Dollar and providing support for the EUR/USD pair.

In the Eurozone, the upbeat ZEW Economic Sentiment Survey has provided temporary support for the major pair. Attention now turns to European GDP growth figures, with estimates suggesting a 0.3% quarter-on-quarter growth in Q1 and steady annualized GDP growth at 0.4% year-on-year.

Meanwhile, the USD/JPY pair trades positively for the fourth consecutive day near 156.55 during the early Asian session on Wednesday. Speculation that the Fed may maintain higher rates amid persistent inflation supports the pair, although concerns about potential intervention in the foreign exchange markets by Japanese authorities could limit its upside.

Finance Minister Shunichi Suzuki's statement on Tuesday indicated the Japanese government's readiness to collaborate with the Bank of Japan on FX market interventions, if necessary. This fear of further intervention could lend support to the Japanese Yen and cap the upside potential of the USD/JPY pair.