Inflation remains a risk, but…

Thoughts of the Day

The US CPI showed prices rose +3.7% (exp +3.6%, prev +3.7%), yet the core index continues to moderate towards the 2% target. Although 10y US bond yields surged by 12bps, the US stock market just fell around -0.5%. Despite geopolitical tension & disappointing US inflation data, S&P500 index is still higher by 1% for the week. This resilience is a sign that the buy-on-dip mentality remains strong.

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Day Ahead

The preliminary print for the US University of Michigan Consumer Sentiment is expected to be 67.4, lower than the previous print of 68.1. UoM Inflation expectations for the year ahead is expected to come in at 3.3% while the 5-Year inflation expectations is expected to come in at 2.9%.

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What Happened Yesterday

Market Movements as of New York Close 12 Oct 23
  • Fedspeak:
    Collins (2025 voter, known centrist): “The central bank is at or near the peak of the interest rate hike cycle. She did not rule out more rate hikes but warned the current stance calls for patience. Increase in bond yields could take pressure off the Fed to raise rates further.”
  • The US Consumer Price Index for September showed that prices rose +3.7% Year-on-Year (vs +3.6% expected) as it did in August. The core index, which excludes food and energy,  rose +4.1% as expected, slightly lower than August’s print of +4.3%.
  • US Initial Jobless Claims for the week ending on 7 Oct was 209k (vs 210 k expected), as it was the week before (revised from 207k). The Continuing Jobless Claims for the week ending on 30 Sep rose to 1,702k (vs 1,680k expected) from 1,672k (revised from 1,664k) the week before. The jobs market remains resilient.
  • The hotter-than expected inflation print and resilient jobs data dented risk sentiment yesterday and sent US bond yields higher with the 10-year bond yields surging 0.12%. In the NY afternoon, when the US treasury bond (3y, 10y, 30y) auctions showed unexpectedly weak demand, the 10-year yield spiked another 0.05% in reaction but as the session ended, yields eased off the highs, but remained 12 basis points higher on the day. 
  • As a result, The US Treasury Yield curve inversion narrowed to 0.36% at closing as the US 2-year bond yield rose +0.07% to 5.06% while the US 10-year bond yield rose +0.12% to 4.70%.
  • The Chinese Consumer Price Index for September was 0%, showing that prices remained unchanged on a Year-on-Year basis (vs +0.2% expected), lower than the +0.1% print in August. The Producer Price Index for September showed that prices fell -2.5% YoY (vs -2.4% expected), higher than the -3.0% print in August. Reaction in the USDCNH pair was limited. Disinflation forces remain strong in the biggest exporter to the world. 
  • The UK GDP grew +0.5% on a Year-on-Year basis in August as expected (vs 0% in July). The monthly print grew at +0.2% as expected, a reversal from July’s contraction of -0.6% (revised from -0.5%). GBP reaction to the data was muted.
  • The ECB monetary policy meeting accounts for the September meeting revealed that some members preferred maintaining rates despite the decision to hike rates in the September meeting. However, a hike was ultimately done as not hiking could send a signal of the governing council being more concerned about the economy and a potential recession than too high inflation. As such, inaction might risk speculation that the tightening cycle was over.
  • The US stock futures drifted slightly higher through the Asian and London trading sessions with the S&P 500 futures up +0.21% before the release of the US Consumer Price Index data. The stronger than expected US CPI data put a dent on risk sentiment as resurgent inflation might cause the US Federal Reserve to consider hiking interest rates further despite a spate of dovish comments from several Fed officials. 
  • The US stock market opened a tad higher from Wednesday. The market then traded weaker following the result of the CPI print and then recovering higher. When the weak bond auction results were announced, the stock market weakened further (S&P 500:  -1.36%, Dow Jones: -1.07%, Nasdaq 100: -1.25%) but investors bought the dip and helped the market regain some of the losses towards the end of the trading session. Consequently, the S&P 500 closed -0.62% lower (high: +0.20%, low: -1.18%), the Dow slipped -0.51% (high: +0.17%, low: +1.03%) while the Nasdaq fell -0.37% (high: +0.61%, low: -0.99%).

The crypto market weakened slightly as risk sentiment waned, Bitcoin fell -0.45% while Ether fell -1.72%.

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Headlines & Market Impact

While ChatGPT stokes fears of mass layoffs, new jobs are being spawned to review AI

Notable Snippet: Artificial intelligence might be driving concerns over people’s job security — but a new wave of jobs are being created that focus solely on reviewing the inputs and outputs of next-generation AI models.

Since Nov. 2022, global business leaders, workers and academics alike have been gripped by fears that the emergence of generative AI will disrupt vast numbers of professional jobs.

As governments assess how to regulate AI, Bradley said that it’s “important that enough focus is given to topics including the fair and ethical treatment of AI workers such as data annotators, the sourcing and transparency of data used to build AI models, as well as the dangers of bias creeping into these systems due to the way in which they are being trained.”

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Oil price shock could spur another rate hike, European Central Bank member says

Notable Snippet: The latest eurozone inflation figures are “comforting” — but oil prices still pose a risk that could push the European Central Bank into another rate hike, Belgium’s central bank governor said Thursday.

“It is one of the factors that, you know, could push inflation higher … inflation would be higher in a way that we will not meet our target in [2025], then I think we would have to do more,” Pierre Wunsch told CNBC’s Joumanna Bercetche, referring to a persistent shock in the price of oil.

But like other ECB Governing Council members at the IMF conference, Wunsch told CNBC that inflation was “going in the right direction” and that if it developed in line with current forecasts, another hike should not be needed.

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Surging rents lift US consumer prices; underlying inflation grinding lower

Notable Snippet: U.S. consumer prices increased in September amid a surprise surge in rental costs, but a steady moderation in underlying inflation pressures supported financial market expectations that the Federal Reserve would not raise interest rates next month.

Economists expected the jump in rents, which was at odds with the rising supply of multi-family housing and independent surveys showing asking rents declining, to reverse in the coming months. With the labour market still tight, however, reaching the Fed’s 2% inflation target could be a long slog, making it likely that the U.S. central bank could keep rates elevated for longer.

In the 12 months through September, the CPI advanced 3.7% after rising by the same margin in August. Year-on-year consumer prices have come down from a peak of 9.1% in June 2022. Economists polled by Reuters had forecast the CPI would gain 0.3% on the month and 3.6% on a year-on-year basis.
But prices for used cars and trucks fell 2.5%, while apparel costs dropped 0.8%. The core CPI gained 4.1% on a year-on-year basis in September, the smallest rise since September 2021, after advancing 4.3% in August. 

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord