All about inflation (again)

Thoughts of the Day

The upcoming US PCE Price Index release is crucial for market sentiment. Expected to show a +3.5% YoY increase (PREV +3.3%), the core index (w/o food & energy) is expected to moderate from +4.2% to +3.9%

If data shows that inflation is moderating towards the 2% target, it could boost risk sentiment and ease Fed rate concerns.

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Day Ahead

The Euro Area Consumer Price Index for September is expected to show that prices rose 4.5% Year-on-Year, down from 5.2% in August.

The US PCE Price Index, the Fed’s preferred measure of inflation, for August is expected to show that prices rose 3.5% Year-on-Year, up from 3.3% in July. The Core index, which excludes the more volatile components of energy and food, is expected to moderate to +3.9% YoY from the +4.2% previously. 

The final print for the University of Michigan Consumer sentiment is expected to come in at 67.7 while the inflation expectations for the year ahead is expected to drop to 3.1% from 3.5% previously.

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What Happened Yesterday

Market Movements as of New York Close 28 Sep 23
  • Fedspeak:
    Barkin (2024 voter, slight hawk):
    “FOMC has time to see data before deciding what’s next for rates. Some slow down needed to lower inflation.”
    Goolsbee (current voter, known dove):
    “Fed could return inflation to target without a recession. The Fed needs to be extra careful of tying policy to historical relationships that may not hold up in the current economy. Wages typically lag prices, so short-term movements should not be used to predict inflation.”
  • The US Initial Jobless Claims for the week ending on 23 Sep was 204k, below the market expectation of 215k and a tad higher than the previous print of 202k. The continuing claims for the week ending on 16 Sep rose to 1,670k (vs 1,675k expected), from the previous print of 1,658k (revised from 1,662k). 
  • The final print for the US GDP growth rate of Q2 showed a Quarter-on-Quarter growth of 2.1% as expected, slightly lower than the 2.2% growth seen in Q1. 
  • The US Treasury Yield curve inversion narrowed to 0.45% as the US 2-year bond yield sank -0.06% to 5.04% while the 10-year bond yield fell -0.02% to 4.59%.
  • The US stock futures oscillated within a wide range through the Asian and London trading sessions but had a slight downward drift with the S&P 500 future falling -0.37% before the New York session began.
  • The US stock market opened lower on the day but traded higher following Fed official Goolbee’s comments but started to falter slightly in the later half of the session due to the lack of market drivers. Consequently, the S&P 500 closed +0.59% higher (high: +1.00%, low: -0.24%), the Dow rose +0.35% (high: +0.68%, low: -0.23%) while the Nasdaq gained +0.84% (high: +1.42%, low: -0.48%) as AMD popped +4.78% on the day following Microsoft CTO’s comments about AMD offering compelling GPU for AI.
  • The crypto market was cheered by the dovish comments from Goolsbee as well with Bitcoin rising +2.6% and Ether rising +3.4%.
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Headlines & Market Impact

Ray Dalio says the U.S. is going to have a debt crisis

Notable Snippet: “We’re going to have a debt crisis in this country,” the founder of hedge fund Bridgewater Associates said in an interview with CNBC’s Sara Eisen that aired Thursday. The two were speaking at a fireside chat at the Managed Funds Association. “How fast it transpires, I think, is going to be a function of that supply-demand issue, so I’m watching that very closely.”

U.S. debt levels surpassed $33 trillion for the first time this month as lawmakers negotiate a U.S. spending bill before the Oct. 1 deadline. A failure to reach an agreement could mean a government shutdown and raise the perceived risk of the country’s debt.

U.S. debt levels have ballooned in recent years, especially after a roughly 50% increase in federal spending between fiscal 2019 and fiscal 2021, according to the U.S. Department of the Treasury. Investors fear interest rates may keep rising as the U.S. fiscal situation worsens, hurting the demand for Treasuries.

Dalio is concerned there are more headwinds for the economy than just high debt levels, saying growth could fall to zero, give or take 1% or 2%.

“I think you’re going to get a meaningful slowing of the economy,” Dalio said.

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Bill Ackman believes the 10-year Treasury yield could approach 5% soon

Notable Snippet: Billionaire hedge fund manager Bill Ackman believes long-term Treasury yields can shoot even higher in the short run on the back of stubborn inflation.

“I would not be shocked to see 30-year rates through the 5% barrier, and you could see the 10-year approach 5%,” he told CNBC’s Scott Wapner at the CNBC Delivering Alpha Investor Summit on Thursday in New York City.

The Pershing Square Capital Management CEO said he did not believe the Federal Reserve could get inflation back down to its 2% target partly due to a resurgent labour movement and high energy prices.

“Our view is that we’re in a different world,” the investor said. “You have a generation of people that are used to rates, you know, four sounding like a high interest rate. On a historical basis, it’s an extremely low rate of interest.”

The benchmark 10-year Treasury yield hit a 15-year high this week, topping 4.65%, as the Federal Reserve signalled higher interest rates for longer this month. The 30-year rate last traded around 4.71%.

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Inflation in Japan’s capital slows but pressures persist

Notable Snippet: Core inflation in Japan’s capital slowed in September for the third straight month mainly on falling fuel costs, data showed on Friday, suggesting that cost-push pressures are starting to peak in a relief for the fragile economic recovery.

But separate data showed factory output was flat in August, a sign companies were feeling the pain from soft global demand and weak signs in China’s economy.

The Tokyo core consumer price index (CPI), which excludes volatile fresh food but includes fuel costs, rose 2.5% in September from a year earlier, against a median market forecast for a 2.6% gain.

It slowed from a 2.8% increase in August but exceeded the Bank of Japan’s 2% target for the 16th straight month.

An index that strips away both fresh food and fuel costs, which is closely watched by the BOJ as a better gauge of broad price trends, rose 3.8% in September from a year earlier after a 4.0% gain in August, the data showed.

While inflation is slowing, continued rises in food, daily necessities and service prices will likely keep the BOJ under pressure to phase out its massive stimulus, analysts say.

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Phan Vee Leung
CIO & Founder, TrackRecord