Focus Turns to US CPI

Market movers today

US CPI will be the main focus today. We forecast both headline and core CPI below consensus expectations at +0.2% in m/m SA terms (consensus 0.3%). The energy price contribution remains positive and used car prices have edged slightly higher lately, but the shelter component continues to put downward pressure on inflation figures. Gradually cooling wage growth points towards further easing in core services CPI excl. shelter as well, which remains the key point of focus for the Fed.

We also get US initial jobless claims and UK monthly GDP for August this morning.

In the Nordics Sweden releases Prospera Inflation Expectations Survey (the smaller monthly survey).

Overnight China CPI for September is expected at 0.2% y/y keeping inflation in positive territory for another month after dipping below zero in July.

The 60 second overview

FOMC minutes signal high for long. The FOMC minutes were much in line with expectations stating that policy should remain ‘sufficiently restrictive’ for some time to return inflation to 2%. Most members saw one more hike as most likely going ahead, but data dependence and a cautious approach going forward was clearly underscored as the guiding principles. Markets price only a small chance of another Fed hike, which we agree with as we believe the Fed is done. Still data on inflation and employment will be key for whether the Fed decides to add another hike or not.

US PPI inflation came in stronger-than-expected in September at 0.5% m/m and core PPI at 0.3% m/m (consensus 0.2% m/m).

China state funds buy bank shares. The Chinese state fund Central Huijin Asset Management bought shares in the big four Chinese state-owned banks and plans to buy more over the coming six months according to filings Wednesday. The news is seen as increasing efforts by Beijing to support the economy and markets and helped lift Chinese stocks, which are up 2.2% in the offshore market this morning.

Wage growth key for Bank of Japan (BoJ). Board member Noguchi of BoJ overnight reiterated the bank’s view that the biggest focus now was to ensure that momentum for wage growth stayed in place, with a 3% rise in nominal pay to back efforts to meet the 2% inflation target. Wage growth in Japan has eased lately after rising earlier in the year.

Energy prices fade. Oil prices declined a bit further overnight now trading below USD86 after hitting USD89 following the Hamas attack on Israel. Concerns over a spread of the crisis to rest of the Middle East have calmed for now. Natural gas prices were broadly stable yesterday.

Equities: Global equities were higher yesterday as yields once again overshadowed all other factors driving equities. Looking at the sector performance yesterday, utilities outperformed together with tech while energy and consumer staples were the poorest performers. This odd mix of sector rotations is seldom seen when macro is the driving force but is very easy to explain as yields and oil price are coming down together. Importantly, the constraint is that underlying macro needs to be strong. Otherwise, we would have seen a classic defensive rotation. We did not see that as cyclicals outperformed defensives by more than 0.5 percentage points. Hence, yesterday was yet another good example of how investors are positioned and how fearful they still are of inflation, central bank tightening and higher yields relative to a weakening growth outlook. We expect these dynamics and investment narrative to continue to dominate the market near-term.

In US yesterday, Dow +0.2%, S&P 500 +0.4%, Nasdaq +0.7% and Russell 2000 -0.2%. Asian markets are continuing the positive trend this morning with solid gains not least in China and Japan. European and US futures are in solid green as well.

Fixed income: Global yields fell further in yesterday’s session, as soft signals from FOMC dominated the effect of a higher-than-expected US PPI inflation print. The Bund curve was bull flattening throughout the day, with the 10Y yield down by 6bp and the 2Y tenor up by 2bp. The decline was very similar across core and peripheral Europe, with only minor change in spreads. 10Y UST yields ended the day 8bp lower in line with a similar decline in real yields (10Y TIPS).

FX: EUR/USD ended the day slightly above 1.06 after the FOMC minutes released last night struck a lightly dovish tone. Today, focus turns to the September CPI release, where we forecast both headline and core CPI below consensus expectations. NOK traded heavy in the afternoon session yesterday amid energy prices coming lower. EUR/GBP remains range bound ahead of a packed tier 1 data week coming up.

Credit: Credit Markets exhibited relatively calm behaviour on Wednesday following some fairly dovish commenting from key central banks. Itrax main was unchanged at 82.6bp, while Itrax Xover tightened 2.2bp to close at 438.2bp. Nordic primary markets saw activity in the SEK space with names such as Nykredit and Vestum printing new bonds.

Nordic macro

In Sweden, Prospera’s monthly (i.e. the small report) inflation expectations survey is due today. The important 5y horizon has been stable just above 2% for the past year and we do not expect this to change this time around either. Notably, expectations took a small step higher on the 1-2y horizon however in the last survey, so might be something to look out for if this should continue this time around as well. But for the Riksbank, the longer time-horizon (5y) still prevails, and the quarterly (big) Prospera report has a larger weight, so we should probably not expect too much in terms of market reactions on today’s survey. In Norway, we get house prices for Q3.

Danske Bank
Danske Bank
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