All prices are at 7.30 BST with changes reflecting movement from midnight BST
Oil - Brent and Crude November futures flat in Asia currently at 94.20 and 87.50 respectively. Oil had a better day yesterday spurred on by supply concerns with the US SPR dropping to its lowest levels in 38 years. In addition any thoughts of a breakthrough in the Iranian nuclear deal seems all but over with the Israeli Prime Minister telling Berlin that the deal was dead.
EQ - Equity markets in Asia back from the holidays and playing a bit of catch up. The Nikkei, which has remained open throughout is showing modest gains to 28,397. However the Hang Seng and Kospi are both up at 19,450 and 320 respectively. The Korean Index up over 3% as it returns from its extended break.
The Nasdaq and S&P continue to hold their recent gains consolidating in the Asian session currently at 12,874 and 4145 respectively.
Near term levels for the S&P at 4085 and 4150 above.
Gold - Gold Dec futures down smalls overnight in Asia at 1733 giving up some of its gains on the back of a weaker USD. There continues to be little to add here as we see 1700 support with topside remaining that noisy zone of 1750/55.
FI - US yields took a step back overnight in Asia with the US2y and 10y yields currently trading down around one percent at 3.54% and 3.33% respectively. Rates pushed higher late in yesterday’s session as the US auctions went worse than expected with the largest tail for the 10y since April on the back of weak bidding metrics.
European yields saw a sell off in yields yesterday closing at 1.654 and 3.94 for the German and Italian 10y yields respectively. On the open we are seeing the spread widening somewhat again as Italian yields start to rally. The 10y gilt in the UK was slightly softer and still remains close to its recent highs closing at 3.083.
FX - The USD continuing its softer tone once again with the USD Index currently at 108.09.The JPY, EUR and GBP all firmer at 142.19, 1.0144 and 1.1714 respectively. Equally USDCNH steady at 6.9250. We continue to think that this period of USD weakness and profit taking makes a lot of sense whilst the rally in equities continues. The level that would change this readjustment into more of a longer term play is around 107.50 in the USD Index.
Others - Bitcoin continued its healthy rally with it now trading at 22,424. It was helped yesterday with news hat Fidelity are considering listing Bitcoin on its trading platform. Ethereum treading water as it heads into the merger at 1722.
The last hammer to fall pre FOMC next week.
Expectations are for headline to fall YoY to 8.1% from 8.5% previously with the main driver for the lower print being the recent collapse in commodity prices. However core is set to remain sticky and indeed tick up a touch to 6.1 from 5.9% previously with the rental property segment underpinning this measure. On the MoM readings headline is expected to print in negative territory for the first time in 2 years. Bloomberg estimates for headline are between 7.9% - 8.3% so a tight range. We believe that with 75bps now more than 90% priced in its going to be hard for the Fed to deviate from this magnitude of hike without a serious miss one way or another. The Fed have shown of late that they will do what the market expects for fear of breaking the fragile market environment. So what constitutes a “huge miss” in order to get another quiet period WSJ piece rolled out? Given the tight range of estimates, we believe a print outwith the 7.5/8.5% range would be needed to get the Fed second guessing. The miss on the downside always seems to be bigger in nature with the Fed erring on the side of caution when it comes to inflation. 8.5% on the topside would match last month’s print and raise concerns for a 100bp hike.
Market wise an inline or “better” print should see stocks continue their rally but our guess is a higher print will have a knee jerk sell off in stocks but once the realisation that the Fed will stick with what is already priced in then stocks should rebound. We believe only 8.5% plus would unsettle the markets.
Couple of further points on inflation. The NY Fed published their latest inflation expectation surveys with both 1y and 3y expectations printing a lot lower at 5.7% and 2.8%. Encouraging news albeit both still well above the Fed’s “target” goal.
Some concerns are growing that a strike by US railroad workers could cause a further spike in inflation in the coming months. The workers voted to strike which could indeed start by the weekend. This is important as coal and fertilisers are transported around the US almost exclusively by rail. A strike would have obvious consequences to the pricing of such commodities. All for the future but worth bearing in mind.
With the Fed quiet period the ECB speakers were front and centre yesterday although with mixed messaging.
Schnabel stressed the need for more hikes for a timely return of inflation to goal.
Guindos was more forthright stating that the jumbo rate hike was aimed at inflation expectations and some of the committee are open to a repeat 75bp hike in October. He was unclear as to how much further rates will rise but was clear that the proposed expansive fiscal policy, which the EU is proposing in light of the energy crisis, would clash with the ECB’s monetary policy.
Scicluna was more dovish with 75bps being not the new norm and yes, rates need to rise but unlikely to be as large as last week’s hike.
Nothing really of note but we shall continue to monitor the ECB speakers throughout the week.
Overnight Data and the Day Ahead
Overnight we had Australian consumer and business confidence data with both beating expectations, German final inflation came in as previously printed and the UK employment report was encouraging with the unemployment rate dropping to 3.6% although earnings ticked higher.
Later in the day we get ZEW surveys in Germany and Europe as well as ECB speakers. BoE Governor Bailey also talks and of course US CPI the main focus.
Early tomorrow sees some Japanese data prints for those with an interest.
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EU ZEW Economic Sentiment Index Sept previous 54.9 (10.00 BST)
German ZEW Economic Sentiment Index Sept consensus -60 vs previous 55.3 (10.00 BST)
US Inflation Rate YoY Aug consensus 8.1% vs previous 8.5% (13.30 BST)
US Inflation Rate MoM Aug consensus -0.1% vs previous 0% (13.30 BST)
US Core Inflation Rate YoY Aug consensus 6.1% vs previous 5.9% (13.30 BST)
US Core Inflation Rate MoM Aug consensus 0.3% vs previous 0.3% (13.30 BST)
Enria (08.30 BST)
McCaul (14.45 BST)
Bailey (09.00 BST)
Japan Reuters Tankan Index Sept previous 13 (00.00 BST)
Japan Industrial Production MoM Jul consensus 1% vs previous 9.2% (05.30 BST)
Japan Capacity Utilisation MoM Jul previous 9.6% (05.30 BST)
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WSJ article was interesting....