Thu, Sep 29, 2022 @ 07:34 GMT
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High US CPI Derails Risk Appetite

Market movers today

More focus on CPI today with inflation releases from both UK and Sweden (see below), where focus will be on the impact from high electricity prices.

US releases PPI which has shown signs of easing inflation pressure lately as commodity prices have come down and pricing power is weakening.

In the euro area industrial production for July is expected to drop 1.0% m/m reflecting the weakening industrial sector.

The ‘State of the Union’ speech President of the EU Commission Ursula von der Leyen could hold further details on how the EU is planning to tackle the energy crisis.

The 60 second overview

US CPI: The US August CPI surprised clearly to the upside yesterday, headline CPI rose only 0.1% m/m due to the lower gasoline prices, but core inflation clearly outpaced expectations at 0.6% m/m (July +0.3%, consensus +0.3%). Importantly, inflation pressures remain broad-based with both core goods and services inflation picking up.

Admittedly, shelter prices continue to explain a decent share of the current inflation (contribution to headline: +0.22%-points m/m), which we do expect to moderate as US housing market cools. In addition, several leading inflation indicators, including the NFIB small business price plans released yesterday, point towards easing price pressures. Nevertheless, with the upside surprise in core CPI, strong economic momentum and persistent labour shortages, Fed’s 75bp hike next week looks like a done deal. Market is even pricing in around 30% chance of a 100bp hike, although if Fed wanted to guide the markets towards faster hiking pace, it would have to do so informally (as in June) due to the blackout period. While we think Fed will likely stick with the 75bp hike for now, yesterday’s figures underline that Fed cannot afford to signal a ‘pivot’ anytime soon. Financial conditions have to be maintained at restrictive levels for longer in order to cool aggregate demand.

Sour risk appetite: The higher than expected US CPI immediately turned risk appetite around and heavy losses were seen in especially interest rate sensitive stocks such as tech. Nasdaq fell a stunning 5.2% and S&P 4.3% – the biggest one-day loss since June 2020. Credit spreads widened and EUR/USD almost instantly moved back below parity. 10Y UST yields moved some 15bp higher to 3.45% and the 2Y UST yield reached a 15 year high at 3.79% overnight.

The market moves were as strong as the number removed any market beliefs that a peak in inflation had been reached in August. For now, it effectively silenced the “peak in inflation is near camp’ and removed any hopes that a peak in the Fed Funds rate is close. The inflation surprise also adds to the risk premium and uncertainty in all asset classes including the term-premium in the yield curve adding further upside to longer-dated yields.

One number can sometimes really make a huge difference for financial markets. The number yesterday was one of those. We would expect the moves seen yesterday to extend ahead of the September 21 FOMC. European equity futures remain in red this morning.

Oil: The sour risk appetite should normally push oil prices significantly lower especially as commercial oil stocks are expected to grow. However, media reports that the White House plans to start rebuilding strategic oil stocks supports prices. Back in March the Biden administration ordered a record 180 million barrel release from the strategic reserves that currently stand at 442 million barrels, its lowest level since 1984. Hence, the oil release decided in the spring to dampen oil prices and inflation is now adding to oil prices and inflation.

Equities: Markets in deep sell-off yesterday after the hotter-than-expected inflation print. US markets witnessed its sharpest drop in almost two years, with Nasdaq -5.2%, S&P 500, Dow and Russell 2000 around -4%. Valuation in focus with cyclicals – and especially growth cyclicals – underperforming. Tech naturally one of the worst performing sectors (FANMAG around -7%), underperforming health care by about 3p.p. Positioning impact was however milder as VIX rose but in line with last week. Similarly, credit spreads widened but less than the reaction in equities (HY -2%). US futures are rebounding slightly this morning.

FI: Yesterday’s market reaction was all about the US CPI being stronger than expected. The euro curves mirrored the UST higher, where particularly the 5y to 10y point underperformed. Bund yields rose 7bp on the day while as the 10s30s curve flattened once again, the EUR swap 10s30s curve stands at almost -40bp.

FX: USD was the big outperformer in yesterday’s session with the US inflation surprise and subsequent surge in USD real rates brining EUR/USD back below parity. In the other end of the spectre, the NOK had a horrible session in part driven by a poor Regional Network Survey and in part by the global investment environment. AUD, NZD and PLN also posted big losses while GBP more or less mirrored EUR price action found in the middle of the pack in FX majors space.

Credit: Credit market sentiment deteriorated on Tuesday, on the back of the slower than expected decline in US inflation. Itrax main widened 4bp to close at 108bp, while Itrax crossover widened by 17.9bp to close at 526.2bp. Primary market activity was still solid, but deal reception was slightly softer compared with Monday, as indicated by generally higher new issue concessions.

Nordic macro

Sweden: The electricity crisis and the skyrocketing electricity prices are in the spotlight when it comes to the inflation outlook. In August we expect consumer electricity prices to have risen whopping 35 % mom, which in itself will add 1.1 p.p. to CPI and CPIF. When it comes to core inflation, Swedish food prices recently appear to be rising faster than seen in the Euro area on average. Hence, food could continue to surprise on the upside. Clothing should bounce back as normal for August and the same applies to hotel/restaurant prices. After the holiday season we also expect a normal, but quite modest, drop in transportation and recreation prices. Our CPIF estimate is in the lower range of consensus at 8.8% yoy (1.3% mom) which is 1.3 p.p. above the Riksbank’s 7.5% forecast. For core CPIF we expect 5.7% (0.4% mom), also in the lower end of the range but 1.1 p.p higher than the Riksbank’s 5.7% estimate. Hence, the Riksbank’s inflation forecast is outplayed as they admitted themselves and reflected in pricing indicating 82bp in September and 100bp in November (we look for two times 75bp).

Danske Bank
Danske Bank
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