It looks like the Fed may have got inflation right. An inflation slowdown could be what is needed to justify their taper delay and suggests they have a couple more months to see how the labor market recovery unfolds. Softer inflation numbers sent US stocks initially higher as expectations for a Fed taper announcement drift to December.
The Russell 2000 index initially outperformed as softer inflation data helps small-cap stocks the most, but that rally did not last. The rotation back to the reopening trade was faded, as economists saw trouble for US companies’ margins, mainly because the rise in producer prices was not passed onto the consumer. The Russell 2000 index and Dow Jones Industrial Average quickly turned negative, while the S&P 500 index was slightly lower and the Nasdaq was grasping at a small gain.
The focus will shift to Apple’s big reveal for the iPhone 13, a new Apple Watch and AirPods. The annual event will likely excite the consumer and lead to a very strong holiday season for Apple. Apple shares are heading into this event well off its record highs, which could allow for strong upside if they impress today.
The next big round of economic releases happens tonight in Asia, which could show the Chinese economy continues to slow. If growth slows too quickly, traders should not be surprised to see more easing from Beijing.
Inflation
The relentless surge across some prices have started to decline. Used car and truck prices declined 1.5%, a positive sign that the global chip shortage might be easing a little bit. This inflation round easily went to team transitory as indexes for airline fares, used cars and trucks, and motor vehicle insurance all declined over the month. Inflation that is hitting the economy is mostly food and energy prices.
The other economic data release of the day was the NFIB small business optimism index. Small business owners are losing confidence in the strength of future business conditions, which could support the Fed’s patience in tapering. Fifty percent of owners said openings could not be filled, up a point from July and a 48-year record high. The problem with the labor market is there is an insufficient amount of qualified candidates for the record amount of job openings. The headline NFIB small business optimism index rose 0.4 points to 100.1.
Oil
Crude prices settled higher after first going on a rollercoaster ride in early trade. Oil prices tumbled early after China announced the plan to sell 7.38 million barrels from its strategic reserves. Last week, China shocked energy markets by announcing that they would tap their reserves for the first time. The China reserve sale driven drop was short-lived as energy traders viewed the amount of barrels as small, roughly a half day’s worth of crude processing.
The focus in the energy market still remains on US production and if Storm Nicholas leads to flooding that could keep production shut-in.
WTI crude rallied after a softer than expected CPI reading sent the dollar sharply lower. Oil rallied alongside all risky assets as the smallest price gain in seven months suggested the Fed won’t be in a hurry to make a taper announcement.
The US inflation report showed the index for airline fares plunged, decreasing 9.1% over the month, a confirmation that demand has moderated.
With an oil market still heavily in deficit, WTI crude will continue to rise if US stockpiles continue to fall and if China’s economy doesn’t slow down too much. Over the short-term WTI crude should not have much trouble hitting the mid-$70s.
Gold
Gold prices got a strong boost from a lighter-than-expected inflation report, that completely removed the risk of a September Fed taper announcement and likely shifted expectations all the way to December. Treasury yields plunged and that helped gold tentatively pierce the $1800 level. This is a pivotal moment for gold and if it can’t push higher as yields plunge, selling pressure could quickly return.
CPI is decelerating and that should be very good for gold in the short-term as real interest rates go down. After the August CPI print, gold should have enough momentum to stabilize above $1800 by the end of today, but if it doesn’t, it could get very ugly.
Bitcoin
Bitcoin prices rebounded after a better-than-feared CPI report sent Treasury yields plunging. The Fed is in no rush to taper and that overflowing bowl of stimulus is good news for cryptocurrencies. Relentless government spending and chaos in fiat currencies is good news for Bitcoin and that narrative is not going away anytime soon. Today, the Mexican central bank said the government bought international reserves worth $7 billion in the past week. Mexico has a debt problem and that story is shared with most of Latin America.
Bitcoin appears to be stabilizing and could continue to consolidate around the $45,000 to $50,000 level.
