Markets
The S&P 500 is trading off yesterday’s highs as back-to-back warmer inflation readings rekindled rate hike fears. After stocks initially shrugged at the CPI data, yields started ticking up, and then bond bears roared back when the long bond sale tailed, and not by a little either: 3.7bps. The non-dealer bid, at 81.8%, was well below average, and with it, unwinding a good chunk of dovish Fed goodwill rhetoric built up this week.
Although coming in not much warmer than expectations, the CPI print failed to reassure investors with the much-needed all-clear signal. The figures themselves didn’t warrant an extreme market reaction, and the CPI update wasn’t considered disastrous in the context of the inflation levels seen during the pandemic. However, it did imply that markets might have been too quick to dismiss the possibility of a November rate hike after this week’s dovish Fed nudge.
The good news is that stocks are up and yields down on the week; hence, equities seem to be showing signs of a rebound from their late-summer swoon, and there’s a reasonable chance of a Q4 rally in the stock market if earnings play ball. Still, much depends on the bond market, particularly long-term US yields.
These are the perils faced by a market heavily influenced by bond movements, especially when investors are fine-tuning their macroeconomic and fiscal narratives in search of a guiding light for long-term yields or the elusive “r-star.”
At the end of the week, the markets are caught in the tug of war over the outlook for US interest rates. On the one hand, there are strong indications from Fed officials and the released Fed minutes that suggest rate hikes are likely finished. On the other hand, economic data is not yet aligned with this narrative.
Forex markets
The clear victor in this scenario is the U.S. dollar( Higher for Longer). The Dollar surged on Thursday, marking its strongest performance since July. This boost pushed the Japanese yen closer to the crucial 150.00 per dollar threshold, raising the possibility of Japanese intervention if that level is breached.
Indeed, the US CPI appears to have been too harsh of a test for short-term dollar bears.
Oil markets
After rallying on the oil agency’s relatively upbeat demand forecasts, crude futures buckled under the weight of a surging US dollar as sticky US inflation has rekindled Fed rate hike jitters. Additionally, the physical buyers market received some relief from a huge increase in U.S. crude oil stocks and record-high oil production, which eased concerns about tight market fundamentals. And with Exxon doubling down on fossil fuels in the Permian Basin, US oil production will most certainly go up.
