Summary: US equity markets rebounded yesterday as investors were unimpressed with another high CPI inflation print for September and saw little to fret in the FOMC minutes from the late September meeting, which suggest a start to taper in mid-November or December. A strong US T-bond auction helped take long US treasury yields lower, sending the USD lower and adding to a strong resurgence in the gold prices, with copper also strong yesterday and adding further to sharp gains overnight.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities tried to turn higher, with at least one major area of concern removed yesterday with the drop in long US treasury yields in the wake of a strong 10-year T-note auction on Tuesday and strong 30-year T-bond auction yesterday. As well, the FOMC minutes were seen as benign relative to expectations. Whether the market can launch an assault on the all-time highs is the next question, with the key resistance perhaps the clearly defined 15,000 level in the Nasdaq 100 index and the recent pivot high just above 4,400 in the S&P 500 Index.
GBPUSD and EURGBP – sterling didn’t stick out remarkably in yesterday’s price action, which showed the US dollar generally heading lower, likely in part on a taming of US long yields and after the FOMC minutes and US CPI data failed to accelerate the time frame of Fed tightening. But GBPUSD is close to achieving a full bullish reversal here on a close above perhaps 1.3675-1.3700 after more than a week of churning back and forth just below that level. This could allow the pair to slip back up into the zone toward 1.4000+. Sterling could outperform the euro as well, as cycle lows below 0.8500 in EURGBP come into view and
USDJPY – interesting that the JPY has stayed sideways versus a rather weak US dollar even as long US treasury yields have been on the defensive over the last couple of days. Perhaps the JPY remains under pressure broadly on general strong risk sentiment combined with rate tightening expectations staying near the highs for the cycle elsewhere, but USDJPY looks “too high” as it trades above 113.50 as long as long US treasury yields are anchored and stay below recent highs.
Gold jumped more than $30 dollars yesterday, boosted by the double whammy of a sharp weakening in the US dollar and US long treasury yields heading lower after a strong US T-bond auction. The move takes the precious metals above the 21-day moving average for the first time in a month and the price is now at the 200-daymoving average which has been an obvious focus on rallies since at least back to July, with the flat-line, range resistance of note at the very clearly defined 1,834 level.
Copper prices leapt higher yesterday on general supply tightness and as the key technical resistance level at 450 cents/pound fell yesterday, perhaps in part encouraged by a softer US dollar. The move opens the path to the highest ever price for the industrial metal just shy of 490 cents per pound posted back in May. Metals prices generally are soaring as the LME London Metals Index is almost at its highest ever level, only about 1 percent below the highest level reached back in 2007.
US treasuries A firm 30-year auction mimicked the strong results the prior day in the 10-year auction, and yields at the short end of the curve (for example, the 2-year) are relatively unchanged since the Tuesday close this morning after some significant intraday churning yesterday on the US CPI release and the FOMC minutes. Treasury bears have suffered a significant setback here on the reversal in the 10-year yield back below 1.56 percent.
German Bunds. German 10-year yields dropped yesterday after nearly reaching the cycle high yields at –7 basis points, following the US treasury yields retreat lower. German yields have trended very consistently off the lows from late August, with the first key resistance for Bunds perhaps the -20-25 basis point area for maintaining a bearish outlook on EU sovereign debt.
What is going on?
China PPI hits new modern record - rising to 10.7% year-on-year (vs. +10.5% expected) and thus the highest level since a year after its 1994 currency devaluation. A rise in coal and natural gas prices have been a key driver of this development. This key inflation gauge deserves close consideration as the world watches for the degree to which “the world’s factory” passes along higher prices to global consumers of its production. The September CPI gauge was merely +0.7% year-on-year, just below +0.8% expected.
US September CPI slightly hotter than expected as the month-on-month headline gauge was +0.4% versus +0.3% expected and +5.4% year-on-year vs. +5.3% expected, while the ex-food-and-energy core number was +0.2%/+4.0% as expected. Some observers noted that shelter-related prices, especially rent, rising more quickly now could prove a forward concern for sticky inflation as these tend to lag home price, which have risen sharply since the pandemic outbreak. CPI rent rose 0.4% mom. It explains half of the jump in core CPI on a monthly basis. Looking into the details, of the 250 CPI subcomponents, almost 94% of them were growing more than 0% yoy last month. This is the highest level since 1991. The biggest increases over last year have been gasoline (+42.1%), used cars (+24.4%), gas utilities (+20.6%) and meats/fish/eggs (+10.5%). Base effect still plays a role in pushing inflation higher. But it is getting increasingly clear that other factors are more important.
FOMC minutes largely confirm market expectations for the QE taper time frame. with the discussion in the minutes suggesting a mid-November to mid-December starting point on an "illustrative example” pace of the tapering of $10 billion/month in US treasuries and $5 billion/month in MBS, which would mean an eight-month time frame of tapering down to zero balance sheet expansion. The minutes seemed to indicate room for flexibility, however, on an “outcome-based standard”, while “several participants” felt the base case pace of tapering was too slow.
Turkish lira posts a new record low on Erdogan moves against central bank – as the Turkish president fired three of the country’s central bankers, one of whom was the only member to vote against the recent policy rate cut, after meeting with the recently politically-motivated appointment of central bank chief Kavcioglu. USDTRY traded above 9.18 this morning after trading below 8.90 as recently as a week ago.
What are we watching next?
Earnings Watch – Yesterday, JP Morgan reported impressive results, though driven by record results in its advisory business and drops in loan loss provisions. Lending activity to consumers and businesses actually fell. This latter concern could weigh on a Main Street bank like Wells Fargo, reporting today. Elsewhere, Delta Airlines was off over 5% yesterday after its earnings report as it beat expectations and earned a profit, but warned on fuel costs for the coming quarter.
Thursday: Fast Retailing, Bank of America, Wells Fargo, Walgreens Boots Alliance, Morgan Stanley, Citigroup, UnitedHealth, US Bancorp, Progressive, Domino’s Pizza
Friday: Zijin Mining, BOC Hong Kong, PNC Financial Services, Goldman Sachs, Charles Schwab, Truist Financial
Economic calendar highlights for today (times GMT)
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
