Strong economy but moderating inflation?

Thoughts of the Day

US Retail Sales surpassed expectations at +0.7% MoM (EXP +0.3), showing that US consumer spending remains strong despite aggressive Fed interest rate hikes. It is good news that inflation continues to moderate lower despite strong economic growth because that may allow policymakers to be more patient in hiking interest rates further.

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Day Ahead

The UK CPI is expected to show that prices rose 6.5% Year-on-Year in September, lower than 6.7% in August. The core index is expected to show a 6% rise in prices YoY, lower than 6.2% previously.

The final print for the Euro Area CPI is expected to show that prices rose 4.3% Year-on-Year in September lower than 5.2% in August. The core index is expected to show a 4.5% rise in prices YoY, lower than 5.3% previously.

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What Happened Yesterday

Market Movements as of New York Close 17 Oct 23
  • Fedspeak:
    Barkin (2024 voter, slight hawk):
    “Longer-term rates have moved up, that has tightened conditions. I believe we have a restrictive policy stance.” When asked if he will vote in favour of holding the policy rate unchanged at the next meeting, “policymakers will have a good debate”.
    Kashkari (2023 voter, known hawk): “It has taken much longer than expected for inflation to come down, and it is still too high.”
    (slight change in tone for Barkin, Kashkari same)
  • The Canadian Consumer Price Index (CPI) showed that prices rose +3.8% Year-on-Year in September (vs 4% expected and prev). The core CPI, which excludes volatile food and energy prices, increased 2.8%, compared to 3.3% in August. The CAD weakened following the data release with the USDCAD rising +0.53% from 1.3631 to 1.3703 in immediate reaction. 
  • The US Retail Sales rose +0.7% Month-on-Month in September (vs +0.6% expected), lower than +0.8% (revised from +0.6%) in August. The Year-on-Year print showed a +3.8% growth in September as well, increasing from +2.9% (revised from +2.5%) in August. The US Dollar Index rose +0.30% from 106.21 to 106.53 following the strong data but came off shortly after.
  • Chinese GDP Growth Rate was stronger-than-expected, growing +4.9% YoY (vs+ 4.4% expected), down from +6.3% in Q2. Quarter-on-Quarter the economy grew +1.3% (vs +1% expected and +0.8% prev). Retail Sales grew 5.5% YoY (vs +4.9% exp and +4.6% prev) while unemployment rate came off slightly to 5% from 5.2% prev. The CNH strengthened on the data release with the USDCNH falling -0.14% from 7.1389 to 7.3085.
  • The US Treasury Yield curve inversion narrowed to 0.36% as the US 2-year bond yield rose +0.10% to 5.19% while the US 10-year bond yield rose +0.12% to 4.83%. Bond yields jumped because the strong retail sales data showed that the US consumer remains resilient and continues to spend despite the Fed’s aggressive interest rate hikes. 
  • The US stock futures drifted lower through the Asian and London trading sessions with the S&P 500 futures down -0.40% before the release of the Canadian CPI and US Retail Sales. The release of the US Retail Sales data sent the S&P 500 futures down another -0.45% before the New York session began.
  • The US stock market opened lower from Monday. The market then climbed higher in the early New York session before easing off in the latter half of the session. Consequently, the S&P 500 closed almost flat on the day at -0.01% (high: +0.46%, low: -0.83%), the Dow was almost unchanged at +0.04% (high: +0.48%, low: -0.38%) while the Nasdaq slipped -0.33% (high: +0.09%, low: -1.58%).
  • [Earnings] Goldman Sachs (NYSE: GS, -1.60%) Earnings: $5.47 (vs $5.31 estimated). Revenue: $11.82 billion vs $11.19 billion expected. The stock underperformed despite earnings beat due to losses arising from exposure to commercial real estate and strategic retrenchment away from retail banking. Bank of America (NYSE: BAC, +2.33%) Earnings: 90 cents (vs 82 cents expected). Revenue: $25.32 billion, vs $25.14 billion expected). Earnings were boosted by interest income.
  • The crypto market traded weak on the day due to weaker risk sentiment on the broader market, especially the tech sector. Bitcoin is down -0.39% while Ether is down -2.18%.
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Headlines & Market Impact

Biden cuts China off from more Nvidia chips, expands curbs to other countries

Notable Snippet: The Biden administration plans to halt shipments to China of more advanced artificial intelligence chips designed by Nvidia and others, part of a raft of measures released on Tuesday that seek to stop Beijing from receiving cutting-edge U.S. technologies to strengthen its military.

The rules, which go into effect in 30 days, restrict a broader swathe of advanced chips and chip making tools to a greater number of countries including Iran and Russia, and blacklist Chinese chip designers Moore Threads and Biren.

The Biden administration also hit 21 countries outside China with a licensing requirement for chip making tools, over fears the equipment could be diverted to China and other national security concerns.

It also added to the list of equipment restricted from going to that country to include some deep ultraviolet (DUV) lithography systems, going beyond recent Dutch regulations to keep the Netherlands’ ASML from sending older DUV models and spare parts to some advanced Chinese chip factories, confirming another Reuters report.

(The new restrictions ban the sale of the slowed-down version of Nvidia chips, the H800 and A800, that were allowed to be exported to China under the old restrictions.) 

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Biden calls off Jordan leg of Mideast trip after leader summit cancelled

Notable Snippet: President Joe Biden will no longer visit Jordan as part of his Middle East trip this week, after a leaders summit on humanitarian aid for Palestinians was abruptly cancelled Tuesday.

The decision was made as unrest across the region swelled, in response to the deadly bombing of a hospital in Gaza.

Biden had been scheduled to meet with Jordan’s King Abdullah, Egyptian president Abdel Fattah El-Sisi, and Palestinian Authority president Mahmound Abbas after first visiting Israel.

“There is no use in talking now about anything except stopping the war,” Jordanian foreign minister Ayman Safadi said on state television.

The bombing of the al-Ahli Hospital in Gaza City Tuesday killed hundreds of people and escalated the ongoing conflict between Israel and Hamas.

Biden “sent his deepest condolences for the innocent lives lost in the hospital explosion in Gaza, and wished a speedy recovery to the wounded,” a White House official told CNBC.

Israel denied that its targeted bombing in Gaza was responsible for destroying the hospital. “A hospital is a highly sensitive building and not an IDF Target. The IDF is currently investigating and as always prioritises accuracy,” a spokesperson for the Israeli Defense told NBC News.

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Putin set to meet ‘dear friend’ Xi as China wraps up Belt and Road summit

Notable Snippet: Russian President Vladimir Putin was set to meet Chinese President Xi Jinping on Wednesday in Beijing, as the two leaders sought to bolster their “no-limits” partnership amid a war in Ukraine and an escalating conflict in the Middle East.

Xi is hosting Putin and dozens of global leaders at the Belt and Road Initiative (BRI) Summit, celebrating 10 years since Xi launched the infrastructure project aimed at strengthening alliances with Asian, African and Latin American nations.

Focus will be on remarks Putin and Xi make about the Israel-Hamas war as U.S. President Joe Biden is set to land in Israel to show support for the country, push to minimise civilian casualties, and keep the conflict from spreading.

This is the second known trip abroad for the Russian leader since the Hague-based International Criminal Court issued an arrest warrant in March, accusing Putin of illegally deporting children from Ukraine. China is not a member of the court.

Russia and China, both permanent members of the United Nations Security Council, have said that the fundamental issue at the heart of the conflict is the lack of justice for the Palestinians.

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Phan Vee Leung
CIO & Founder, TrackRecord