Fri, Dec 09, 2022 @ 05:17 GMT
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US CPI Surprising on the Downside Sparks Risk Rally

Market movers today

The European Commission will publish its autumn forecasts for the European countries today. We will look for the fiscal projections into next year.

Today also brings UK GDP growth for Q3 which we expect will be in negative territory (-0.3% q/q), marking an official start of the recession.

In the US, we get the flash Michigan Consumer Survey for November.

The 60 second overview

US CPI: All eyes were on the US CPI yesterday. The US October inflation figures came out below expectations, with headline CPI rising by 0.4% m/m (consensus 0.6%) and core by 0.3% m/m. Underlying price developments were even weaker than the headline figures suggest, as they were supported by the recent uptick in oil prices, and past rises in house prices continuing to feed into shelter CPI with a lag. Core goods (-0.4%) finally reflected past months’ easing in commodity and freight costs, but also included a -2.4% decline in the still elevated used car prices. Notably, services CPI excl. shelter declined by 0.1% (Sep +0.9%), although this was partially explained by an unusually sharp decline in medical care prices. Given that labour market conditions remained tight and wage inflation picked up in October, we think that further upside risks to inflation still persist, but naturally the low print challenges our hawkish view on Fed hiking rates by 75bp in December. See our summary of October inflation figures from Global Inflation Watch, 11 November.

The below consensus US CPI print spark a risk rally across the board with major indices up between 3 and 5%, tighter bond spreads, etc. Markets traded the disappointing CPI figure as the Fed is pivoting. We believe it is still too early to trade the central bank pivot, but yesterday’s release reduces the risk of another 75bp hike, where we saw the Dec22 Fed pricing was 11bp lower on the day. The risk rally continued this morning in the Asian session.

A few Fed speakers were on the wires after the release where we highlight Daly and Logan who do not share the same view. Daly said that she would rather do too much than too little while Logan said they may soon be ‘appropriate’ to slow hiking pace not to overtighten. George said that there is ‘more work to do’.

Equities: Equities exploded yesterday with Nasdaq surging 7.4% (!), S&P500 5.5% and Russell 2000 6.1%. This is the biggest one-day-gain since April 2020 and in all fairness it is very seldom we see such moves outside a trough. Growth and quality stocks outperformed massively, with tech, real estate and communication services up 8% (outperforming consumer staples by 6p.p.). All sectors were higher, but worth noting that tech outperformed industrials by 4p.p. so it was mainly a growth rally. Also, VIX only dropped very moderately to 23. Futures are continuing higher today.

FI: The pricing also spilled over to the European rates, not least to a significant risk on move, where notably Italian-German spread tightened 11bp to stand at 200bp on the potential for ECB also ending ‘too early’ to get QT on the way. The rally was led by the 5-7y area, which was 17bp lower in Germany. US treasuries ended almost 30bp lower on the day 5-7y point.

FX: Commodity prices, including oil, rose more than 1% on the back of the drop in US inflation. We think the bounce owes to the big drop in USD and to us is a sign that a more pronounced Federal Reserve ‘pivot’ on monetary tightening could fuel a rally in commodity markets. We think it is too early to call. Commodity markets also rose after a similar inflation surprise in August, but that only lasted three days, before prices fell back. That said, EUR/USD has now risen from 0.95 to 1.02 since late September.

Credit: Yesterday, credit markets were initially relatively flat until the US CPI numbers were announced. Lower than expected inflation released an instant and significant risk-on mode with tightening of CDS indices. iTraxx Main was 7.9bp tighter to 99.6bp while Xover was 36.4bp tighter at 488.3bp. On the other hand, the primary markets saw only modest new deal activity across the Eurobond market.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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