Eyes back on Inflation

Thoughts of the Day

Fed official, Bostic suggests no more rate hikes are needed to target 2% inflation. While this dovish tone is comforting markets, any signs of resurging inflation in the upcoming US data (PPI today, and CPI tomorrow) can quickly change the sentiment.

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Day Ahead

The US Producer Price Index for September is expected to show that prices rose +1.6% Year-on-Year as it did in August. The core index is expected to show a +2.3% gain YoY. (vs 2.2% prev)

The Federal Reserve meeting minutes for the September meeting will be released.

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What Happened Yesterday

Market Movements as of New York Close 10 Oct 23
  • Fedspeak:
    Bostic (2024 voter, slight dove):
    “I think our policy rate is sufficiently restrictive to get inflation to 2%. A lot of our policy impact is clearly yet to come. We don’t need to increase rates any more.”
    Waller (current voter, known hawk): “Price stability is a primary responsibility of the Federal Reserve. This is why we have taken forceful steps aimed at reducing inflation—and why we will stay on the job to achieve our objective.”
    Kashkari (current voter, known hawk): “US economy is headed toward a soft landing but warned that it is not yet time to declare victory. The US economy has shown unexpected resilience.” He cautioned that if the economy becomes too strong, the central bank may have to raise rates further. Kashkari described the recent increase in the 10-year Treasury yield as “perplexing.”
    Daly (2024 voter, slight hawk): “If bond yields are tight, could be equivalent to another rate hike – maybe the Fed doesn’t need to do as much if the market tightens. Decline in goods inflation has been an easy win, not largely due to the Fed’s rate hikes.”
  • The US Treasury Yield curve inversion remained at  0.30% as the US 2-year bond yield rose +0.03% to 4.96% while the US 10-year bond yield rose +0.02% to 4.66%.
  • The US stock futures did not make much headway during the Asian and London trading sessions.
  • The US stock market opened higher from Monday. The market surged even higher following Bostic’s comments about not needing rate hikes anymore. However, it came off slightly after Waller’s comments. Consequently, the S&P 500 closed +0.52% higher (high: +1.15%, low: +0.09%), the Dow rose +0.40% (high: +0.87%, low: 0.00%) while the Nasdaq gained +0.56% (high: +1.29%, low: +0.02%).
  • The crypto market traded lower on a day with not many crypto drivers. Bitcoin and Ether are down slightly more than -0.7%.
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Headlines & Market Impact

Bank of England warns U.S. tech stock valuations may be out of whack

Notable Snippet: “Given the impact of higher interest rates, and uncertainties associated with inflation and growth, some risky asset valuations appear to be stretched,” the U.K. central bank’s financial policy committee said Tuesday. “Stretched risky asset valuations increase the likelihood of a greater correction in prices if downside risks to growth materialise.”

The comments from the Bank of England come at a time when many popular technology stocks trade at a sharp premium to the S&P 500, as rates sit near record highs and geopolitical tensions mount abroad.

Even after a pullback in some technology shares following the recent climb in rates, the price-to-earnings ratios for Microsoft, Alphabet and Nvidia sit at 29, 21 and 31 times next 12-month earnings, respectively. By comparison, the PE for the S&P 500 sits at roughly 18 times.

“And some measures of U.S. equity risk premia remained well within the lower quartile of their historical distribution, driven primarily by the continued strength in the U.S. tech sector,” the report added.

To be sure, this isn’t the first time that a central bank has warned of valuations, but as a general rule, policymakers would rather not offer an opinion on any specific market price. The most famous exception was former Fed chief Alan Greenspan, who warned of “irrational exuberance” in the stock market in a speech in December 1996. 

Fueled by the tech bubble of the late 1990s, stocks didn’t top out for more than three years after Greenspan’s remarks, and ever since central bankers have mostly avoided commenting on asset values.

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IMF says global economy ‘limping along’, cuts growth forecast for China, euro zone

Notable Snippet: The International Monetary Fund on Tuesday cut its growth forecasts for China and the euro zone and said overall global growth remained low and uneven despite what it called the “remarkable strength” of the U.S. economy.

In its latest World Economic Outlook, the IMF left its forecast for global real GDP growth in 2023 unchanged at 3.0% but cut its 2024 forecast to 2.9% from its July forecast of 3.0%. World output grew 3.5% in 2022.

Gourinchas said the forecasts generally pointed to a soft landing, but the IMF remained concerned about risks related to China’s property crisis, volatile commodity prices, geopolitical fragmentation and a resurgence in inflation.

Research by the IMF showed a 10% increase in oil prices would dampen global output by about 0.2% in the following year and boost global inflation by about 0.4%, he said.

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Paul Tudor Jones doubles down on BTC as recession looms

Notable Snippet: Hedge fund manager Paul Tudor Jones continues to tout bitcoin amid a macro backdrop that he said makes it difficult to invest in equities. 

The US is likely to slip into a recession in the first quarter of 2024, the billionaire told CNBC in an interview Tuesday.

“I would love gold and bitcoin together,” Tudor Jones said. “I think they probably take on a larger percentage of your portfolio than they would [historically] because we’re going to go through both a challenging political time here in the United States and we’ve obviously got a geopolitical situation.”

The comments come amid what Tudor Jones said “might be the most threatening and challenging geopolitical environment that [he’s] ever seen.” He added that the US is “probably in its weakest fiscal position since World War II.”

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Phan Vee Leung
CIO & Founder, TrackRecord