Signs that inflation could be a threat again?

Thoughts of the Day

US PPI data exceeded expectations, indicating a potential inflation threat.(ACT +2.2%, EXP +1.6%, PREV +1.6%). However, market sentiment stabilized as the Fed’s minutes reveal discussions about ending the rate-hiking cycle due to confidence in inflation control. Awaited CPI data will be pivotal in confirming this newfound confidence.

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Day Ahead

The UK GDP is expected to show a YoY growth of +0.5% in August (vs 0% in July).

The ECB monetary policy meeting accounts for the September meeting will be released.

The US Consumer Price Index for September is expected to show that prices rose +3.6% Year-on-Year, slightly below the +3.7% print in August. The core index is expected to show a +4.1% gain YoY (vs +4.3% prev).

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What Happened Yesterday

Market Movements as of New York Close 11 Oct 23
  • Fedspeak:
    Bowman (current voter, known hawk):
    “Inflation remains well above the FOMC’s 2% target. This suggests the policy rate may need to rise further. And stay restrictive for some time to return inflation back to the target goal.”
    Waller (current voter, known hawk): “Financial markets are tightening and that will do some of the work for us. The Fed can watch and see what happens on rates. If current trends continue, inflation will basically be back to the target.”
  • The US Treasury Yield curve inversion widened to 0.41% as the US 2-year bond yield rose +0.03% to 4.99% while the US 10-year bond yield fell -0.08% to 4.58%.
  • The US stock futures remained quiet through the Asian trading session. However, momentum started to pick up during the early London trading session with the S&P 500 futures rising +0.37% before the release of the US Producer Price Index data. Risk sentiment then started to weaken following the release of the PPI data with a stronger than expected core print (see headline 3)
  • The US stock market opened slightly higher from Tuesday. The market traded weaker in the first half of the session before making a bounce from the lows following the release of the Federal Reserve meeting minutes (headline 1). Consequently, the S&P 500 closed +0.43% higher (high: +0.47%, low: -0.30%), the Dow rose +0.19% (high: +0.42%, low: -0.38%) while the Nasdaq gained +0.72% (high: +0.77%, low: -0.08%).
  • The crypto market continues to trade lower despite gains in the US stock market. Bitcoin is down -1.87% while Ether is down -0.79%
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Headlines & Market Impact

Fed officials see ‘restrictive’ policy staying in place until inflation eases, minutes show

Notable Snippet: Federal Reserve officials at their September meeting differed on whether any additional interest rate increases would be needed, though the balance indicated that one more hike would be likely, minutes released Wednesday showed.

While there were conflicting opinions on the need for more policy tightening, there was unanimity on one point – that rates would need to stay elevated until policymakers are convinced inflation is heading back to 2%.

“A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted,” the summary of the Sept. 19-20 policy meeting stated.

The document noted that all members of the rate-setting Federal Open Market Committee agreed they could “proceed carefully” on future decisions, which would be based on incoming data rather than any preset path.

Another point of complete agreement was the belief “that policy should remain restrictive for some time until the Committee is confident that inflation is moving down sustainably toward its objective.”

However, in the dot plot of individual members’ expectations, some two-thirds of the committee indicated that one more increase would be needed before the end of the year. The FOMC since March 2022 has raised its key interest rate 11 times, taking it to a targeted range of 5.25%-5.5%, the highest level in 22 years.

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China’s consumer spending isn’t roaring back to pre-pandemic levels yet

Notable Snippet: Retail sales for the Sept. 29 to Oct. 5 holiday period rose by 9% from a year ago, according to state media reports of Ministry of Commerce data. The figures did not include Oct. 6, the final and eighth day of the Golden Week holiday.

While that marked a pickup in pace from August, the multi-year trend in retail sales indicates less than 3% growth a year since the start of the pandemic, according to estimates from Christine Peng, head of Greater China consumer sector at UBS.

“What we are saying is there is a recovery but it’s going to be gradual,” she told CNBC in a phone interview Tuesday. “Nowadays the consumption growth is still way below the pre-Covid level.”

China’s retail sales fell by 0.2% in 2022, according to official figures. Retail sales had grown by 8% in 2019.

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Gasoline, food drive US producer prices higher; core inflation cools

Notable Snippet: U.S. producer prices increased more than expected in September amid higher costs for energy products and food, but underlying inflation pressures at the factory gate continued to abate.

The mixed report from the Labor Department on Wednesday was published ahead of the release on Thursday of September’s consumer price index data, which is expected to show inflation moderated last month. The report is being closely watched for clues on whether the Federal Reserve will raise interest rates against the backdrop of higher U.S. Treasury yields and conflict in the Middle East.

The producer price index for final demand rose 0.5% last month after accelerating by an unrevised 0.7% in August.

Economists polled by Reuters had expected the PPI would gain 0.3%. In the 12 months through September, the PPI increased 2.2% (vs +1.6% expected) after advancing 2.0% in August.

The core PPI increased 2.7% on a year-on-year basis (vs 2.3% expected) in September after climbing 2.5% in August. (This differs from the data mentioned in the article as the author uses the unconventional core PPI.)

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Phan Vee Leung
CIO & Founder, TrackRecord