Markets Advance As Focus Falls On US CPI

Economic

Forex

Summary:

The September US Consumer Price Index (CPI) report is likely to influence expectations around whether the Fed will keep rates higher for longer.

Asian shares advanced on Thursday following the moderately positive performance from Wall Street overnight as dovish Fed minutes and easing oil prices supported risk sentiment. However, markets remain cautious amid mounting geopolitical tensions in the Middle East and incoming US data. European markets opened higher ahead of the ECB meeting minutes while US futures are flashing green as the focus falls on the U.S. consumer inflation report later today. In the currency space, dollar weakness has been a theme this week amid growing expectations around US rates peaking. Looking at commodities, oil prices fell for a third day after industry data revealed a larger-than-expected rise in crude inventories, while gold continued its rebound as the USD and Treasury yields retreated.

Dollar steady ahead of US Inflation data

The September US Consumer Price Index (CPI) report is likely to influence expectations around whether the Fed will keep rates higher for longer.

Headline inflation is expected to cool to 0.3% month-on-month from 0.6% seen in the prior month while the core is projected to remain unchanged at 0.3%. Should September's CPI report show evidence of cooling prices, this is likely to boost bets around the Fed pausing hikes for the rest of 2023 and weaken the dollar further. As of writing, traders are currently pricing in a 10% probability of a 25-basis point hike in November, with this rising to 30% by December, according to Fed Funds futures. A sticky inflation print may halt the decline in the dollar and see it resume its uptrend.

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Forex

USD: CPI to challenge dollar correction

Yesterday's U.S. PPI inflation figures for September surprised on the upside. The headline rate rose 0.5% month-on-month versus the 0.3% consensus while the core rate rose 0.3% MoM versus the expected 0.2%. While it doesn't always have a direct read-through for CPI, it still makes it more likely that today's CPI figures come in at 0.4% MoM for the headline and 0.3% for the core, above the 0.1% or 0.2% MoM readings that would be consistent with year-on-year inflation falling back to the 2% target.

The market reaction to the higher-than-expected PPI reading was quite muted though, as the majority of investors appear to be endorsing the view that minor bumps on the disinflation road can be sustained given that higher market rates now disincentivise the Fed from hiking again. That narrative has effectively been encouraged by a number of Fed speakers now. Yesterday, Christopher Waller – a hawk – said the FOMC can watch and see what happens before taking further action on rates.

This more dovish rhetoric by the Fed has also partly overshadowed yesterday's FOMC minutes, which signalled that members saw inflation as “unacceptably high”. At the same time, the minutes showed that “all participants agreed that policy should remain restrictive for some time”, warning that the economic outlook was “highly uncertain”. Our U.S. economist notes that there is a feeling the Fed was getting more cautious before the spike in Treasury yields, which also tends to endorse the view that rates have peaked.

As a result, the dollar has stayed mildly pressured. We think today's CPI print is a bigger test for USD short-term bears though, and we warn against attaching hopes of a sustainable dollar decline to declining U.S. yields, as activity data continues to hold the key to the dollar outlook beyond the very near term. The correction in DXY may extend to 105.00, but a return to 106.50 seems more likely, in our view.

EUR: Eyes on the minutes

The European Central Bank released the result of its consumer expectations report yesterday, which showed a marginal increase in August's inflation expectations for both 12 months ahead (3.4% to 3.5%) and three years ahead (from 2.4% to 2.5%). These are small changes, but the fact that inflation expectations are still rising despite the ECB's rate hikes supports the hawkish argument.

Markets are, however, pricing close to zero chance of another hike in the eurozone, and the rather cautious tone by ECB speakers is probably helping this dovish view. We'll continue to hear ECB members' remarks today, with Frank Elderson, Francois Villeroy, Robert Holzmann, Klaas Knot, Boris Vujcic, Bostjan Vasle and Fabio Panetta all scheduled to speak.

The ECB will also release the minutes of the September meeting. This will likely be the occasion where the EUR faces some idiosyncratic effect: EUR/USD has been almost entirely a dollar story so far this week. We'll probably see more evidence of a divided governing council, with many members having preferred to hold rates steady in December. There are downside risks for the euro, but not very big considering markets have already priced out tightening expectations.

GBP: GDP in line with expectations

UK GDP rose 0.2% MoM in August, in line with consensus, however the previous number was revised slightly lower. Industrial production came in at 1.3% YoY versus the consensus of 1.7%. The pound is unchanged after the release.

The Bank of England's focus remains firmly on inflation and the jobs figures, which will be released next week. Market expectations of another hike this year (two meetings left) are below 50%, with the spillover from the U.S. narrative of “higher rates = no more hikes” also being felt.

Still, the euro remains rather unattractive compared to the higher-yielding pound, and the decline in EUR/GBP may have more room to go from current levels. A move below 0.8600 in the near term is possible.

Today's UK calendar includes the BoE's credit conditions survey and a speech by the BoE's Chief Economist Hue Pill.

CEE: Rates remain the main driver of FX

Today we only have data from Romania in the calendar, which was published this morning. Inflation in September fell from 9.4% to 8.8% YoY, only slightly above the market estimate. Q2 GDP was revised down slightly from 1.1% to 1.0%, but QoQ we moved from 0.9% to 1.7% QoQ after the revision. On the other hand, the industrial numbers are negative again.

In FX market, as we mentioned earlier, over the past two weeks, rates seem to be the main driver for CEE FX. So yesterday's move in rates showed where we actually are. It seems that for now the rate receivers will take a break for a while and we might stabilize a bit ahead of the U.S. CPI numbers. After Tuesday's inflation numbers, we see that the CZK followed the rates move and could stabilize around 24.550 EUR/CZK for now.

On the other hand, HUF rates have again jumped down significantly, pushing the NBH into bigger rate cuts, as we discussed yesterday. So, for us, the main message here is that HUF rates are leaving lower rates exposed to further weakness. Just rates indicate levels around 392 EUR/HUF, but a slightly lower U.S. dollar could dampen this room for weakness probably.

Source: ING

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Owen Li

Energy

Oil prices fell for the third straight day on Thursday, erasing most of the gains from the supply uncertainty caused by the Israel-Gaza war.

Brent, the benchmark for two thirds of the world's oil, was trading 0.24 per cent lower at $85.61 a barrel at 9.16am UAE time. West Texas Intermediate, the gauge that tracks U.S. crude, was down 0.4 per cent at $83.16 a barrel.

On Wednesday, Brent settled 2.09 per cent lower at $85.82 a barrel. WTI closed down 2.88 per cent at $83.49 a barrel.

Oil Prices Wipe Out Most of The Gains from Israel-Gaza Conflict as Supply Fears Ease_1

"The only thing that is becoming clear for energy traders is that the road for the global growth recovery is getting rockier," said Edward Moya, senior market analyst at Oanda.

"The U.S. consumer is weakening, Germany might be headed for a deeper recession, and [there are] fears that China's economic slump could be widening."

U.S. crude stocks, an indicator of fuel demand, rose by 12.9 million barrels last week, according to the American Petroleum Institute.

Analysts polled by Reuters were expecting a gain of 500,000 barrels.

Russian President Vladimir Putin on Wednesday said that co-ordination between OPEC+ partners would continue.

"This is important for the predictability of the oil market and as a result for the welfare of all humanity," Mr Putin said at the Russian Energy Week.

Oil prices jumped more than 5 per cent on Monday as traders feared that military clashes between Israel and Hamas would escalate into a broader conflict, potentially disrupting Middle East crude supplies.

The death toll from the Israel-Gaza war is nearing 2,500 as the conflict enters a sixth day.

U.S. President Joe Biden on Wednesday warned Iran to "be careful" after the Hamas attacks.

This followed reports on Monday of Iran's involvement in Hamas's surprise attack, although the country has denied those claims.

Iran's production has recovered to a five-year high of 3.1 million barrels per day in recent months, despite current sanctions.

"The good news is that OPEC now has a decent spare capacity to stabilise global oil prices thanks to their production cut strategy," said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

"In the actual geopolitical context, crude oil could further rise toward the $90-$100 a barrel range but a rise beyond the $100 level is unlikely with the morose global economic outlook."

This week, the International Monetary Fund kept its global economic expansion forecast for 2023 at 3 per cent, below the 3.5 per cent expansion recorded last year, retaining the historical growth average of 3.8 per cent.

The fund estimates growth to hit 2.9 per cent next year, a 0.1 percentage point downgrade from its forecast in July.

Source: The National News

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Swissquote

Economic

Stocks

Flight to safety continued on Wednesday, as Middle East tensions rose by another notch after Iran-backed Hezbollah said it fired missiles to an Israeli military post near the Lebanese border. U.S. Treasuries, gold and Swiss franc gained. Gold extended gains to almost $1880 this morning, as the U.S. 10-yer yield fell to 4.55%. The dollar-franc fell below its 200-DMA and is preparing to flirt with the 90 cents mark, as the dollar index lost ground for the 6th straight session. Crude oil, however, fell more than 3% after the API reported a huge – more than 12-mio barrel build – in U.S. crude inventories last week. The latter came as a relief to those worried about supply disruptions due to rising Middle East tensions.

The easing U.S. yields and the dollar's depreciation are of course due to mounting tensions in the Mid East, but they are also due to a recent softening in Federal Reserve (Fed) speakers' policy approach. We spent the week hearing that the Fed may have done hiking the interest rates, and that the recent surge in the U.S. long-term yields should give room to the Fed to sit down and evaluate. Released yesterday, the minutes from the latest FOMC meeting suggested a less hawkish tone from the U.S. policymakers. The Fed members agreed last month that the rates should remain high for long, but they also noted that 'the risks of overtightening had to be balanced' against bringing inflation toward the 2% policy target.

Equities extend rebound

The probability of a no rate hike in November jumped above 90% after the Fed minutes, whereas this probability stood at around the 70% level at the beginning of this week. U.S. fed funds futures price in more than 70% for a no hike in December as well, whereas this probability closer to 50/50 a few days ago.

The retreat in U.S. Treasuries and the dollar is not purely driven by, yes, a swift move to safe haven assets. It is also driven by the Fed expectations. This is certainly why we also see the S&P500 extend gains for the 4th consecutive session. The S&P500 gained every day since tensions in the Middle East started. If the yields were down only on the Middle East war, risk assets – like equities would have been left behind. This is not the case. Investors buy stocks, they buy bonds, and they also buy some gold and Swiss franc to hedge it off.

But inflation could spoil sentiment

Revealed yesterday, the producer price inflation in the U.S. came in higher than expected. The headline PPI jumped from 2% to 2.2%, whereas the market expectation was a fall to 1.6% in September. The uptick was clearly due to rising energy prices since summer and the strongest rise in food prices in nearly a year. Core PPI on the other hand rose from 2.5% to 2.7%, leaving the expectation of a fall to 2.3% well behind. Due today, the U.S. CPI data could, or could not show a further fall in headline and core inflation. A higher-than-expected set of inflation data could scale back a part of the recent dovishness regarding the Fed and reverse a part of the recent gains in U.S. Treasuries.

To stay updated on all economic events of today, please check out our Economic calendar

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Danske Bank

Economic

Forex

Bond

Market movers today

U.S. CPI will be the main focus today. We forecast both headline and core CPI below consensus expectations at +0.2% in m/m SA terms (consensus 0.3%). The energy price contribution remains positive and used car prices have edged slightly higher lately, but the shelter component continues to put downward pressure on inflation figures. Gradually cooling wage growth points towards further easing in core services CPI excl. shelter as well, which remains the key point of focus for the Fed.

We also get U.S. initial jobless claims and UK monthly GDP for August this morning.

In the Nordics Sweden releases Prospera Inflation Expectations Survey (the smaller monthly survey).

Overnight China CPI for September is expected at 0.2% y/y keeping inflation in positive territory for another month after dipping below zero in July.

The 60 second overview

FOMC minutes signal high for long. The FOMC minutes were much in line with expectations stating that policy should remain ‘sufficiently restrictive' for some time to return inflation to 2%. Most members saw one more hike as most likely going ahead, but data dependence and a cautious approach going forward was clearly underscored as the guiding principles. Markets price only a small chance of another Fed hike, which we agree with as we believe the Fed is done. Still data on inflation and employment will be key for whether the Fed decides to add another hike or not.

U.S. PPI inflation came in stronger-than-expected in September at 0.5% m/m and core PPI at 0.3% m/m (consensus 0.2% m/m).

China state funds buy bank shares. The Chinese state fund Central Huijin Asset Management bought shares in the big four Chinese state-owned banks and plans to buy more over the coming six months according to filings Wednesday. The news is seen as increasing efforts by Beijing to support the economy and markets and helped lift Chinese stocks, which are up 2.2% in the offshore market this morning.

Wage growth key for Bank of Japan (BoJ). Board member Noguchi of BoJ overnight reiterated the bank's view that the biggest focus now was to ensure that momentum for wage growth stayed in place, with a 3% rise in nominal pay to back efforts to meet the 2% inflation target. Wage growth in Japan has eased lately after rising earlier in the year.

Energy prices fade. Oil prices declined a bit further overnight now trading below USD86 after hitting USD89 following the Hamas attack on Israel. Concerns over a spread of the crisis to rest of the Middle East have calmed for now. Natural gas prices were broadly stable yesterday.

Equities: Global equities were higher yesterday as yields once again overshadowed all other factors driving equities. Looking at the sector performance yesterday, utilities outperformed together with tech while energy and consumer staples were the poorest performers. This odd mix of sector rotations is seldom seen when macro is the driving force but is very easy to explain as yields and oil price are coming down together. Importantly, the constraint is that underlying macro needs to be strong. Otherwise, we would have seen a classic defensive rotation. We did not see that as cyclicals outperformed defensives by more than 0.5 percentage points. Hence, yesterday was yet another good example of how investors are positioned and how fearful they still are of inflation, central bank tightening and higher yields relative to a weakening growth outlook. We expect these dynamics and investment narrative to continue to dominate the market near-term.

In U.S. yesterday, Dow +0.2%, S&P 500 +0.4%, Nasdaq +0.7% and Russell 2000 -0.2%. Asian markets are continuing the positive trend this morning with solid gains not least in China and Japan. European and U.S. futures are in solid green as well.

Fixed income: Global yields fell further in yesterday's session, as soft signals from FOMC dominated the effect of a higher-than-expected U.S. PPI inflation print. The Bund curve was bull flattening throughout the day, with the 10Y yield down by 6bp and the 2Y tenor up by 2bp. The decline was very similar across core and peripheral Europe, with only minor change in spreads. 10Y UST yields ended the day 8bp lower in line with a similar decline in real yields (10Y TIPS).

FX: EUR/USD ended the day slightly above 1.06 after the FOMC minutes released last night struck a lightly dovish tone. Today, focus turns to the September CPI release, where we forecast both headline and core CPI below consensus expectations. NOK traded heavy in the afternoon session yesterday amid energy prices coming lower. EUR/GBP remains range bound ahead of a packed tier 1 data week coming up.

Credit: Credit Markets exhibited relatively calm behaviour on Wednesday following some fairly dovish commenting from key central banks. Itrax main was unchanged at 82.6bp, while Itrax Xover tightened 2.2bp to close at 438.2bp. Nordic primary markets saw activity in the SEK space with names such as Nykredit and Vestum printing new bonds.

Nordic macro

In Sweden, Prospera's monthly (i.e. the small report) inflation expectations survey is due today. The important 5y horizon has been stable just above 2% for the past year and we do not expect this to change this time around either. Notably, expectations took a small step higher on the 1-2y horizon however in the last survey, so might be something to look out for if this should continue this time around as well. But for the Riksbank, the longer time-horizon (5y) still prevails, and the quarterly (big) Prospera report has a larger weight, so we should probably not expect too much in terms of market reactions on today's survey. In Norway, we get house prices for Q3.

To stay updated on all economic events of today, please check out our Economic calendar

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Warren Takunda

Traders' Opinions

Forex

The Pound to Dollar (GBP/USD) exchange rate is on track for a sixth consecutive daily gain on Wednesday, boosted by growing expectations that the Federal Reserve (Fed) may not raise interest rates as aggressively as previously anticipated.

Dovish Fed

Several Fed officials have adopted dovish stances recently, suggesting a reduced need for aggressive interest rate hikes. Fed Vice Chair Philip Jefferson and Dallas Fed President Lorie Logan, for example, have both commented on the tightening financial conditions caused by rising Treasury yields, suggesting that this could reduce the need for further rate hikes. Atlanta Fed President Rafael Bostic and Minneapolis Fed President Neel Kashkari have expressed similar views, with Kashkari highlighting the importance of satisfying market expectations regarding future Fed actions.

Dollar Weakness

The recent dovish signals from Fed officials have led to a significant weakening of the US dollar. This has benefited the Pound, which is on track for its sixth consecutive daily gain against the dollar. The Australian and New Zealand dollars are also benefiting from the dollar's weakness, although their outlook is more uncertain due to the ongoing struggles of China's property sector.

Upcoming Data Releases

Upcoming data releases, such as Wednesday's Producer Price Index (PPI) and Thursday's Consumer Price Index (CPI), will be closely monitored for any signs that inflation is starting to cool. If inflation remains high, it could lead to a more hawkish stance from the Fed, which would support the dollar. However, if inflation shows signs of easing, it could further weaken the dollar and support the Pound.

The Pound is likely to remain well-supported in the near term, as markets continue to digest the recent dovish signals from Fed officials. However, investors should be mindful of the upcoming CPI and PPI data releases, as well as the potential for a more hawkish stance from the Fed if inflation remains high.

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Samantha Luan

Forex

Dollar continues its slide, maintaining its position as the week's worst performer and further descending following the release of FOMC minutes. The document indicated a majority of the Committee members anticipate an additional rate hike this year, aligning with recent dot plot projections. However, the market seems to have shrugged off this hawkish message.

Attention now pivots to the imminent release of US consumer inflation data, which is expected to reveal lower annual headline and core CPI for September. However, the monthly readings, especially the core, may draw heightened attention due to their exclusion of last year's base effects. Current Fed fund futures indicate a subdued expectation of a rate hike, with less than 10% likelihood for November and approximately 28% for December.

On the global stage, Yen trails Dollar as the week's second-worst performer, with New Zealand Dollar and Euro following suit. Sterling and Swiss Franc are leading the way, with the former awaiting cues from UK's GDP data release. Canadian and Australian dollars remain ambivalent in their positions.

Treasuries are also in focus, particularly the reaction of yields to US CPI data. Technically, 10-year yield has seen a significant dip from last week's high of 4.887 to the current 4.595, yet early signs of steadiness are emerging.

A rebound at this juncture would argue that price actions from 4.887 are merely a sideway consolidation pattern. That would provide a buffer against the dollar's sell-off. However, a definitive break below 4.5 could suggest a deeper correction from the earlier surge to 3.253, prompting a more pronounced decline to the 55 D EMA (now at 4.339) , thereby adding to Dollar's woes.

Dollar Remains Weak Post-FOMC Minutes; Eyes on Upcoming CPI Data_1

In Asia, at the time of writing, Nikkei is up strongly by 1.63%. Hong Kong HSI is up 1.89%. China Shanghai SSE is up 0.83%. Singapore Strait Times is up 0.89%. Japan 10-year JGB yield is down -0.25 at 0.754. Overnight, DOW rose 0.19%. S&P 500 rose 0.43%. NASDAQ rose 0.71%. 10-year yield dropped further by -0.060 to 4.595.

Fed minutes show majority leaning towards further rate hike

In the minutes from Fed's September 19-20 meeting, while "a majority of participants" believed another rate increase might be in order, a contrasting view was held by "some" who deemed no further hikes necessary.

A unanimous consensus was evident among all attendees that the existing policy stance needs to "remain restrictive for some time". The chief rationale behind this unified sentiment is to ensure that inflation trends downwards in a sustained manner to Fed's target.

An interesting shift in communication strategy was proposed by "several participants". They emphasized that discussions and subsequent messaging should transition from deliberating the potential height of rate hikes to determining the duration for which rates should be maintained at these elevated, restrictive levels.

In terms of gauging risks, participants "generally judged" that challenges to fulfilling the Fed's mandates had become "more two sided". However, a lingering concern persists. Despite this balanced view of risks, "most participants" continued to see upside risks to inflation.

Fed's Collins eyes prolonged restrictive rates

Boston Fed President Susan Collins noted overnight her expectation that the central bank may need to maintain interest rates at restrictive levels "for some time" until there's tangible evidence of inflation moving back to 2% target.

While acknowledging that the policy rates might currently be near their peak, Collins did not rule out the possibility of additional rate hikes.

She stated, "And while we are likely near, and could be at, the peak for policy rates, further tightening could be warranted depending on incoming information."

Amidst the pervasive economic uncertainties and risks characterizing the current financial climate, Collins remains cautiously optimistic. She believes that the restoration of price stability is achievable, anticipating an "orderly slowdown in activity and only a modest increase in the unemployment rate."

Japan's PPI slows to 2% yoy in Sep, trailing CPI core for the first time since 2021

Japan PPI slowed from 3.3% yoy to 2.0% yoy in September, below expectations of 2.3%. That's the lowest level since March 2021. Also, PPI is now below CPI core (at 3.1% yoy) for the first time since early 2021.

Import price index was unchanged at -15.6% yoy, the sixth month of decline. Export price index rose for the first time in seven months, up 0.2% yoy, comparing to prior month's -0.7% yoy.

For the month, PPI fell -0.3% mom. Import price index rose 0.6% mom. Export price index rose 0.5% mom.

Looking ahead

UK GDP, production and trade balance will be released in European session. ECB will also publish meeting accounts. Later in the day, US CPI and jobless claims are the main releases.

USD/CHF Daily Outlook

USD/CHF's fall from 0.9243 is in progress and intraday bias stays on the downside. Strong support could be seen around 38.2% retracement of 0.8551 to 0.9243 at 0.8979 to contain downside on first attempt. Break of 0.9081 will turn bias back to the upside for stronger rebound. However, sustained break of 0.8979 will argue that deeper fall is under way to 61.8% retracement at 0.8815. Dollar Remains Weak Post-FOMC Minutes; Eyes on Upcoming CPI Data_2

Dollar Remains Weak Post-FOMC Minutes; Eyes on Upcoming CPI Data_2

In the bigger picture, current development indicates that rise from 0.8551 is reversing whole down trend from 1.0146. Further rally would then be seen to 61.8% retracement at 0.9537 and above. For now, this will be the favored case as long as 55 D EMA (now at 0.8971) holds, even in case of deep pullback. Dollar Remains Weak Post-FOMC Minutes; Eyes on Upcoming CPI Data_3