S&P 500 Holds Gains as CPI Sparks Yields Bump

Also 5-year T-note, gold, crude oil, and British pound futures

1. S&P 500 e-mini futures (/ES): +0.41%

2. Five-year T-note futures (/ZF): -0.23%

3. Gold futures (/GC): -1.33%

4. Crude oil futures (/CL): +0.21%

5. British pound futures (/6B): -0.41%

Another disappointing U.S. inflation report has shaken up financial markets–though not to the degree of the January U.S. CPI report.

The February inflation data showed continued progress in the fight against inflation but not to the degree that was hoped: both the headline and core readings came in at or below last month’s but did not decline as much as anticipated.

U.S. equity markets have experienced whippy price action but are trying to resolve themselves higher in the face of what has been persistent weakness in the bond market since the data release. Higher yields are putting the brakes on the precious metals trade as the U.S. dollar finds renewed vigor.

S&P 500 up a bit

S&P 500 futures (/ESH4) rose modestly, about 0.33%, Tuesday morning despite a slightly hawkish inflation report for January that showed core prices rising 0.4% in February from a month before.

While that left inflation above the Fed’s target, it may not be enough to derail a June rate cut, although traders might be hesitant to dive back into risk assets before the dust settles. Oracle (ORCL) rose nearly 13% in pre-market trading as the artificial intelligence boom bolstered its cloud business outlook.

Treasuries fall

Treasuries are moving lower following the CPI report, which put pressure on bonds due to a 3.2% year-over-year increase, which pressures the narrative that the Fed might be able to cut rates as soon as June.

The 10-year T-note futures (/ZNM4) fell 0.22% ahead of the opening bell, pushing its yield up to 4.139%. Today’s 10-year note auction from the Treasury has high expectations following yesterday’s relatively strong three-year offering, which saw a high yield of 4.256% versus a when-issued yield of 4.269%.

Gold drops

Gold prices (/GCJ4) are on track to break an eight-day win streak that placed the commodity at record-high levels.

Precious metals traders did not like this morning’s inflation report, but with the recent run it was also an ideal time to take some profits off the table, so we might not want to take away too much from the initial move. Wholesale price data due out on Thursday offers the next data on inflation ahead of next week’s Federal Reserve decision. If that data comes in hot, it could put more pressure on gold prices.

Crude oil down

Crude oil (/CLJ4) softened following the inflation data as broader demand concerns hold back oil bulls.

A round of ceasefire negotiations between Israel and Hamas broke down, leaving the war to drag on into the short-term future while Houthis continue to attack ships in the Red Sea despite U.S. airstrikes and the presence of warships that are conducting intervention operations.

Today will see the American Petroleum Institute report inventory data, with traders expecting to see a small build of 400,000 barrels. However, refinery throughput has increased in recent weeks, which may help to diminish stocks at a quicker-than-expected pace.

Pound and yen move down

British pound (/6BH4) and Japanese yen futures (/6JH4) dropped after U.S. inflation data prompted a strong response in the dollar as short-term Treasury yields rose.

While the potential for an exit from ultra-loose settings by the Bank of Japan remains an attractive driver for the long trade on the currency, road bumps from underlying dollar strength might hold back a rally in the yen, especially if inflation drivers in the U.S. strengthen.

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater

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