Stocks moved higher during yesterday’s US session and the positive mood has continued throughout the Asia Pacific session and is boosting European equities and US futures this morning. For reference, after closing out yesterday’s session with gains of about 0.3% to take it back above 4350, E-mini S&P 500 futures are this morning up about 0.7% and pushing back towards the 4400 that has provided solid resistance in recent sessions. Meanwhile, the pan-European Stoxx 600 index is up just under 1.0% and at two-week highs above 460, while the Nikkei 225 and Kospi 50 both closed roughly 1.5% higher. The exception during the Asia Pacific session was a more neutral tone seen in the Chinese equity space, as traders there digested mixed inflation figures that saw CPI come in at 0.0% MoM (lower than the expected 0.3%) and the YoY rate fall back to 0.7% versus expectations for a rise to 0.9% in September from 0.8% in August, while the YoY rate of PPI topper expectations coming in at 10.7% in September versus forecasts for a rise to 10.5% from 9.5% in August. Analysts said the data emphasised the margin challenge faced by Chinese companies (i.e. difficulties raising consumer end prices to make up for rising input costs). Amid the recent surge in energy costs and the apparent worsening of global supply chain disruptions, PPI is expected to remain elevated for the foreseeable future.
Focusing back on the improved tone for global equity markets, no one catalyst can be pointed at down as underpinning the rebound. US CPI data yesterday saw the headline rate come in hotter than expected at 5.4% YoY in September while the core rate was in line with consensus at 4.0%. Economists suspect that prices in sectors that got a boost from reopening and stimulus cheques are likely to continue to subside, but the recent rise in energy prices is yet to be fully priced into the index and the cost of shelter is expected to continue to rise as it plays catch up to the surge seen in US house prices over the last 18 months. We also had the release of the minutes of the 22nd of September FOMC meeting; mirroring the tone of recent FOMC rhetoric and Powell’s remarks in the post-FOMC meeting press conference at the time, the minutes revealed that FOMC members had largely set a low bar for economic conditions to meet for QE tapering to be appropriate before the end of the year – the recent reaction by FOMC members to the September jobs report released last Friday strongly suggests this low bar has been met. The minutes revealed some more information about what the taper timeline might look like; mid-November and mid-December were both touted as potential dates to begin the taper, which itself might proceed at a pace of $10B per month in treasuries and $5B per month in mortgage-backed securities, meaning the taper would be complete no later than July, a timeline very much in line with market expectations. Neither the release of the CPI report of minutes had an obvious impact on market sentiment at the time yesterday.
Some market commentators have this morning been framing the rebound being seen in global equities over the past two sessions as a result of increasing confidence that a front-loaded rate hiking cycle from major central banks like the Fed and BoE will be successful in taming long-term inflationary pressures and thus meaning that long-term interest rates won’t have to go as high. Recent price action in US bond markets fits this narrative; short-end US yields have been pressing higher in recent days, hitting fresh post-pandemic highs close to 0.40% yesterday and still trading above 0.35% this morning, indicative that bond markets are discounting a more aggressive pace of rate hikes in the coming two years, while longer-term yields have been trading with a negative bias, with the US 10-year now looking likely to test the 1.50% level today or tomorrow having reversed sharply back from multi-month highs above 1.65%. This recent downside in longer-term yields is being driven by a drop in real yields, suggesting increased confidence that Fed policy is set to remain highly accommodative in the long-term.
However, this narrative might be overly optimistic and reading too much into things. It seems counterintuitive to say that markets are becoming more confident in the ability of central banks to take long-term inflationary pressures during a week where headline US CPI has unexpectedly moved higher again (and may move higher in the months ahead) and survey evidence suggests consumer inflation expectations are becoming further de-anchored (3Y consumer inflation expectations rose to 4.2% a NY Fed survey showed earlier in the week. If you ask me, inflation risks have further risen this week, and US break-even inflation expectations, which remains at recent highs, endorse this view. Moreover, the recent move lower in long-end yields does not yet mark a break of the recent upwards momentum, most technicians would argue. Nor does the recent upside seen in US stocks mark a breakout of the negative bias witness since the start of September; the S&P 500 is currently trading within its ranges of recent weeks. After the prolonged move higher in long-term US yields, some technical correction was always likely, especially when the 10-year ran into its 200DMA in the 1.60s%. Traders should be cautious that if inflation fears do again rear their head, the recent trends of long-term yields moving higher and stocks coming under pressure may well resume.
Looking at other asset classes; oil is back on the front foot with WTI pressing on towards recent highs around $82.00 per barrel, with traders talking about a bullish IEA monthly oil market report as being a major factor behind the latest leg higher. For reference, the International Energy Agency (IEA) upped both its 2021 and 2022 oil demand growth forecasts and noted that the ongoing energy crisis could boost demand by as much as 500K barrels per day. Gas prices are also heading higher again in Europe, which could be underpinning the crude complex. In terms of FX, the US dollar is seeing further weakness against the majority of its G10 rivals apart from the yen. The Dollar Index (DXY) has slumped back below the 94.00 level but is hitting resistance in the form of the 20th of August high at 93.75, weighed by the drop in longer-term real yields. The yen is likely failing to garner support from the drop in US yields due to the more risk-on tone to trade today, with USDJPY continuing to trade within its recent 113.00-113.75ish range that has been in play for the past three days. In terms of the rest of the G10 then, the NZD is the standout performer, with NZDUSD up nearly 1.0% on the day to above 0.7000 again, despite a lack of obvious catalysts to drive the outperformance. CAD, AUD and GBP are all up about 0.5% on the day versus the buck, with the Aussie not seemingly paying too much heed to employment data that saw total employment in the country drop as expected in September due to lockdowns, but the unemployment rate surprisingly drop, and the number of full-time jobs actually rise. CHF is up about 0.4% and EUR about 0.2%, both as a result of the weaker USD.
There has also been a lot of focus on the Turkish lira, which has been getting slammed today after more interference by President Erdogan in the CBRT. The Turkish President, who unconventionally believes that interest rates need to be lowered to bring Turkish inflation under control (CPI nearly hit 20% in August), has fired three members of the rate-setting committee who reportedly did not support rate hikes. That puts pressure on the rest of the committee to fulfill Erdogan’s wishes for lower rates or else face losing their jobs and analysts have thus been revising their expectations for CBRT policy over the coming months. The bank is likely to embark on an aggressive cutting cycle in the coming months, even though recent currency weakness is likely to further push up inflation. USDTRY, which surged above 9.00 for the first-time last week, nearly hit 9.20 this morning and is now up more than 10% since the start of December.
Looking ahead to the rest of the session, market participants will be focus on the release of the latest weekly US jobless claims report and PPI metrics at 1330BST. Focus will then turn to a barrage of Fed speakers, including Fed’s Bullard at 1330BST, Bostic at 1400BST and then again at 1500BST (these two sit on the hawkish end of the Fed spectrum). Sterling traders will be on the lookout for remarks from the usually dovish BoE’s Mann at 1540BST, ahead of a further bombardment of Fed speak from the likes of Barkin at 1715BST, Daly and Williams at 1800BST and Harker at 2300BST.