September 15, 2021

Markets Today: Has US inflation peaked?

The market was looking for an ease in US CPI readings and in the end the figures delivered a bit more than expected

Todays podcast

Overview Man’s not hot

  •  US CPI softer than expected
  • US equities turn south after a positive open
  • UST curve bull flattens. 10y down 4.5bps to 1.28%
  • Commodities turn south, Aluminium leading decline. China a concern
  • Roller coaster FX ride ends with a slightly stronger USD and pro-growth pairs weaker
  • AUD overnight high of 0.7373 and now 0.7320
  • Coming Up: AU Consumer Sentiment, China Activity readings, US Empire survey

The girl told me, “Take off your jacket”

I said, “Babes, man’s not hot” (never hot) – Big Shaq


US CPI figures printed softer than expected triggering a UST curve bull flattening. After a positive start, US equities ended the day lower with declines in all sectors led by financials and energy.  The USD fell on the CPI print, but then reversed course with weakness in commodity prices hurting pro-growth currencies. After a short bounce, AUD and NZD ended the day lower, now at 0.7320 and 0.7098.

The market was looking for an ease in US CPI readings and in the end the figures delivered a bit more than expected . The August headline CPI rose 0.3%, a tenth below the 0.4% pencilled by consensus while the core reading rose 0.1%, well below expectations for a 0.3% outcome.  Looking at the details the 9.1% collapse in airline fares on the back of the Delta wave was bigger than many had expected while the 1.5% decline in used cars, the first decline since February and likely the start of a sustained drop, was also another major contributor for the softer than expected outcome. Used cars were the big contributor to the spring rise in US inflation and expectations for further declines over coming months (as fleet demand eases) suggest we shouldn’t expect a near term rebound in core inflation.

That said, there are still many factors suggesting inflation is unlikely to ease significantly, inflation remains strong for food, housing and other goods. The decline in airline fares and hotel room rates are likely to reverse as the Delta wave fades. Nick Smyth, my BNZ colleagues also noted that alternative core inflation metrics, such as the median and trimmed mean CPI measures, both of which exclude the most volatile inflation components, increased to 2.4% and 3.2% respectively. Thus, debate on higher US inflation has not gone away and next year the big focus will be to what extent the expected rise in wages will deliver a more longer lasting upward pressure on prices. On the day, however, the softer print eases concerns over an imminent acceleration in prices and should nullify any lingering pressure on the Fed to taper in September, but a taper this year still looks like a good bet with November or December now looking more likely.

Reaction to the data triggered a bull flattening on the UST curve with the 30y and 10y tenors down around 4.5bps to 1.284% and 1.861 % respectively while the 2y note fell 2bps to 0.208%. For now, the story since August is that 10y UST yields remain unable to sustain moves above 1.30%. A look at the break-even component revealed a 4bps decline on 10y rate to 2.33%, suggesting the market is still comfortable with higher inflation being a transitory phenomenon.

US equities open higher but were unable to sustain the positive vibes. The S&P 500 close down 0.57%, the Nasdaq composite fell 0.45% while the Dow was -0.84%. The flattening of the curve hurt financials -1.41 while energy ( -1.55%) and Materials (-1.17%) also struggled. Early in the session the Euro Stoxx 600 closed essentially unchanged, down 0.01%.

In FX land , the softer than expected CPI weighed on the USD and axiomatically triggered a jump in other currencies. The DXY index fell 0.34% on the data, but in the end the move was short lived, a softer equity back drop instigated a demand for safety while a decline in commodity prices hurt pro growth currencies such as the AUD and NZD . Aluminium led the decline in the commodity complex, ( -2.26%) with metal prices (-1.37%) and copper (1.19%) not too far behind. Ahead of the August Activity readings todya (more below), concern over China’s growth outlook continue tob ubble in the background. Yesterday China Evergrande warned of default risks amid plunging property sales, raising the chance of contagion for other privately owned developers, the CSI 300 index closed 1.49% lower with the market also looking at the potential economic impact from Covid lockdown measures in the province of Fujian while ports and airpotrs shutdowns in Shanghai as typhoon Chantu approaches have not helped either.

So against this backdrop, the AUD climbed to an overnight high of 0.7373, but now trades at 0.7320. Meanwhile NZD climbed to an overnight high if 0.7156 and now trades at 0.7098.

Also weighing on the AUD over the past 24 hours has been more dovish rhetoric from RBA Governor Lowe.  Lowe pushed back against market pricing of rate hikes in 2022 and early 2023 in his speech yesterday, saying this was difficult to reconcile with his central view that inflation and wages will rise only slowly from here.  The market continues to price around 50bps of RBA rate hikes by the end of 2023.  Lowe’s dovish talk weighed on the AUD/NZD cross which briefly traded sub the 103 mark before recovering somewhat, the cross now trades at 1.0312.


Coming Up

  • New Zealand publishes Q2 current account balance figures, Australia gets consumer confidence (Sep) and then is all about China activity reading for August. Later in the day the UK gets inflations figures for August (Core 2.9% exp. yoy vs 1.8% prev.) ahed the US Empire Manufacturing Survey (18 exp. vs 18 prev.) and industrial production (Aug).
  • China August activity reading are expected to be soft given lockdown measures introduced over the second half of July and August following the Nanjing covid outbreak. Retail Sales are expected to ease to 18.9%ytd yoy from 20.7% previously while Industrial Production is seen at 13.5%ytd yoy vs 14.4% prev.  Fixed Asset ytd yoy at 9% vs 10.3%.
  • ECB Chief Economist Philip Lane speaks at IMFS webinar about the ECB’s strategy review


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