Markets Today: Lies, damn lies and statistics

August U.S. CPI data turned out to be the driver of much of Friday night’s market price action. The 0.3% rise in the core CPI series pushed annual growth up to 2.3% from 2.2% – matching its post-recession cycle high and versus the 2.2% expected.

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August U.S. CPI data turned out to be the driver of much of Friday night’s market price action. The 0.3% rise in the core CPI series pushed annual growth up to 2.3% from 2.2% – matching its post-recession cycle high and versus the 2.2% expected. It’s worth splitting hairs here, since the 0.3% rise was an unrounded 0.2523%, so a very ‘low’ 0.3% – 2.4 thousandths of a percent lower and core CPI would have printed 0.2% and much of Friday’s price moves might not have occurred. Who says statistics are boring?

Also out Friday was the preliminary University of Michigan consumer sentiment index which disappointed expectations coming in unchanged at 89.8 but which failed to resonate.

The upside CPI surprise was largely the result of a whopping 1% jump in healthcare costs, which represent 11% of core CPI and 19% of the Fed’s preferred core PCE deflator measure of inflation (August figures due on 30 September).

The other big news event was in the UK. Bloomberg ‘source’ reports suggesting that UK Chancellor Hammond was ready to accept that Britain might have to give up membership of the EU single market in order to satisfy immigration restrictions that lay at the heart of the ‘Brexit’ vote, sent Sterling into a fresh tailspin – down by over 2 cents against the US dollar. Hints from EU President Donald Tusk that UK PM Theresa May will invoke Article 50 to commence EU exit procedures in January or no later than February next year, also contributed to Sterling’s travails.

The US CPI report saw US equities drop at the open, though in the face of headwinds from Europe following the near 10% drop in Deutsche Bank’s share price after Thursday night’s call from the US Department of Justice for the bank to pay $14bn to settle claims for miss-selling of mortgage backed securities. The S&P500 ended Friday night just 0.38% lower at 2139.16. The VIX actually ended lower on the day, -0.93 to 15.37 and down 12.2% on the week.  The Eurostoxx 50 (of which Deutsche Bank is a component) lost 1.3%.

The US dollar was stronger across the board (+0.8% on average) and bond yields higher (the 2-year note yield rose by 3.6bps to 0.764% and 10s by just 0.1bp to 1.693%).

Alongside, we saw a small lift in the implied odds on the Fed lifting rates next week (20% from 19%) or in December (64% from 59%). This might just mean we get a bigger relief rally in the face of the ‘no change’ that we and most of the market expects next Wednesday night. A rise in rate would be a major market shock. The last time the Fed sprung a hawkish surprise was back in 1994, 22 years ago and which precipitated the ‘great bond market massacre’.

The Mexican Peso remains the whipping boy in EM FX, largely on the narrowing poll gap between Trump and Clinton, USD/MXN +1.37% to 19.61. But GBP/USD was by far Friday’s biggest loser, -1.79% to 1.3002. AUD/USD fell by 0.32% to 0.7491 and is 0.07478 thus far Monday morning.

Coming Up

There’s really only two big games in town this week and both on Wednesday when first the Bank of Japan and then the Fed hand down their policy decisions and accompanying narratives. In the case of the Fed this will include a new set of economic and ‘dot point’ interest rate projections and a Janet Yellen press conference. This and the immediate post-FOMC statement will be what drive markets – assuming no change in the Fed Funds rate target (our view).  Assuming no change, one immediate point of interest will be the number of dissenters – Esther George for sure, Loretta Mester almost certainly and – possibly – Eric Rosengren, all of whom have made the case for moving ahead with gradual rate rises in recent weeks. In short, some attempt at a ‘hawkish no change’ may be the order of the day.

In the case of the BoJ, the uncertainly over what if anything they will do means that the decision itself should be what carries the day (and alongside the release of the ‘comprehensive review’ of the efficacy of its policy measures  to date, to which the BoJ committed at the July meeting).

Our best guess – and it is frankly little more than that – is that the BoJ will elect to take measures that underpin the recent steepening of the yield curve. This could be achieved by finessing its QE bond buying programme (more flexible adherence to the ¥80tn annual target and a skew in purchases towards shorter dated bonds) and quite possibly taking its policy rate deeper into negative territory.  If they succeed in this without sending equities into a spin, it can help the cause of a (modestly) weaker yen.

Fed and BoJ aside, there’ll be keen local interest in new RBA Governor Phil Lowe’s appearance at a parliamentary committee in Sydney on Thursday, and what the RBNZ has to say, also on Thursday following what should be a no-change rates decision.  We also get September RBA meeting minutes Tuesday morning and the latest NZ GDT auction on Tuesday night – expected to post further price gains.

Overnight

On global stock markets, the S&P 500 was +0.63%. Bond markets saw US 10-years +0.19bp to 1.69%. In commodities, Brent crude oil -0.17% to $45.77, gold-1.2% to $1,306, iron ore +0.0% to $55.97. AUD is at 0.7478 and the range since Friday 5pm Sydney time is 0.7475 to 0.7513

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