By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Trading conditions were rather turgid yesterday, as stocks wobbled, and crude gained, with the looming US CPI report capping conviction. Today, another light data docket lies ahead.
WHERE WE STAND – After a tumultuous Tuesday, it ended up being a bit of a wearisome Wednesday for financial markets yesterday, amid rather turgid trading conditions and (again) a distinct lack of fresh data- or news-flow.
We did, at least, get the latest UK inflation figures which, while we can’t exactly call them good news, we can at least say they’re ‘less bad’ than we thought they would be. Headline prices rose 3.8% YoY last month, below the BoE’s forecast for a 4.0% increase, and unchanged from August, while the closely-watched services CPI gauge rose 4.7% YoY, also equal to the pace seen last time out. Clearly, it’s far too early to say that the UK is ‘out of the woods’ on the inflation front, but at long last things do seem to be stabilising somewhat.
My base case remains that the MPC will stand pat for the rest of the year, seeking evidence that the peak is indeed past in terms of price pressures, while also waiting to see what the late-November Budget brings – chiefly, whether another round of inflation-inducing tax hikes are on the cards. Still, not only does the GBP OIS curve now imply a 3-in-4 chance of a 25bp cut before year end – which feels too punchy to me – but Gilts also rallied strongly across the curve, with the benchmark 10-year yield hitting its lowest since early-April.
That move, though, has likely come too late for the OBR to account for it in their upcoming forecasts, even if there will probably now be plenty of protests from HM Treasury for it to be included. Recall, the lower the Gilt yield assumption, the smaller the fiscal ‘black hole’ that needs to be plugged.
Away from that UK data, things were all rather uninspiring, with markets meandering along for much of the day. I wonder if participants are starting to get a little nervous, and lack conviction to some degree, as we anticipate the US CPI report on Friday. In some respects this is to be expected, given that it’ll likely prove the only top-tier US release we get this month, but in many others it’s rather unusual, taking into account that whatever the CPI data looks like, it is highly unlikely to materially alter the FOMC policy outlook, with 25bp cuts in both October and December all-but-guaranteed at this stage.
Of course, that looser monetary backdrop, coupled with both earnings and economic growth remaining robust, continues to underpin the bull case for equities, with spoos having rather quietly rallied back to within spitting distance of a fresh high in recent sessions. Perhaps it’ll take confirmation of President Trump stepping back from the recent threat of additional 100% tariffs on China to print a new record, but I’d certainly not be wanting to play things from the short side where we sit right now.
On a similar note, it feels increasingly like crude benchmarks might be starting to bottom out, with both Brent and WTI advancing once again yesterday, and the Brent curve moving further back into backwardation as well. While the market is, clearly, grossly over-supplied, it appears that the US are ready to come in and sit on the bid, having announced 1mln bbl of purchases for the strategic petroleum reserve on Tuesday, and with Energy Sec Wright touting further purchases yesterday. While the fundamental backdrop remains pretty weak, it’s tough to imagine participants having much confidence to lean into a bearish view, when there’s an almost price-insensitive buyer operating in the market.
Gold also looks to potentially be bottoming out around the 4k/oz mark, as the unwind of stretched longs from Tuesday gives way to considerably calmer trading conditions. The overall bull case for bullion remains a solid one, not least amid insane levels of reserve demand, but also amid the ongoing risk of inflation expectations un-anchoring, and amid runaway DM government spending. I remain a dip buyer.
The bull case for the buck remains a solid one as well, with the DXY climbing north of the 99 figure once more, as the greenback benefits not only from the Fed’s ‘run it hot’ approach, but also gains somewhat by default, given that there is little else in G10 worth anyone’s time right now.
LOOK AHEAD – As the US government shutdown continues, so does the barren nature of the economic calendar. We shan’t be getting the weekly jobless claims figures, nor the September existing home sales report today, though at least we are due to get the latest CPI data tomorrow lunchtime.
Elsewhere, there’s a few bits and bobs of note, including August’s Canadian retail sales stats, and this month’s preliminary eurozone consumer confidence report. Minutes from the September SNB meeting are also due, though what they’ll look like is anyone’s guess, as it’ll be the first time the SNB have published such an account.
Along with that, another busy slate of corporate earnings awaits, highlighted by the likes of American Airlines (AAL) and Southwest (LUV) before the open, followed by Intel (INTC) and Newmont (NEM) after the close.