Markets Today: UK inflation thunder

Yesterday’s song title was Start me up by the Rolling Stones and it still seems an apt description with the risk‑on tone continuing overnight.

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The S&P500 hit another record high (+0.3%), yields rose across the board (US Treasuries +3.7bps), while the US dollar held onto yesterday’s gains. Outperforming was the Pound (+0.9%) on the back of stronger than expected inflation figures which has seen markets pull forward expectations for a Bank of England rate hike to May 2018 from Dec 2018.

In a quiet night for data risk sentiment remained positive. The UN Security Council voted early morning Sydney time to adopt new sanctions against North Korea (major items: a cap on oil imports; bans on the export of textiles; and preventing overseas North Korean workers from remitting funds). The market mostly shrugged off threats by North Korea to inflict the “greatest pain” on the US it has ever suffered, especially given China and Russia agreed to the sanctions.

In FX the biggest mover was the Pound. GBP/USD soared 0.9% to 1.3283 – its highest since September 2016. Stronger than expected inflation data supported with headline inflation spiking to 2.9% y/y, against expectations of 2.8% rise, and equalling the four-year high seen in May. Driving the price increase was clothing and petrol with the weaker pound since Brexit the main culprit. Gaining the markets attention was the core measure which was also stronger than expected at 2.7% y/y (2.5% expected). In response the market has pulled forward expectations of a Bank of England rate hike to May 2018 from Dec 2018, while the market’s assessment of the terminal rate has also risen with one year OIS in five years time up 12.5bps to 1.06%. The move in market pricing now brings it more in line with Governor Carney’s words in August that the first rate hike was not likely until August 2018.

Other currency pairs were more muted. The USD (DXY) held onto yesterday’s gains to be unchanged at 91.912. With risk aversion abating the safe haven currencies fell: Yen (-0.8%) and Swiss Franc (-0.5%), while the Euro rose 0.1%. The Aussie was little moved overnight, down 0.1% to 0.8019.

Across the ditch, the Kiwi outperformed, up 0.5% to 0.7291 on the back of better polling for the incumbent National Party ahead of the election on 23 September. The most recent Newshub poll puts the National Party at 47.3% and Labour at 37.8% which would be just enough for the party to form government in their own right (61 seats in a 121 seat Parliament).

As for yields, the UK CPI data saw Gilts rise 9.0bps to 1.14%. That bled through to other major sovereign bond yields with German Bunds +6.5bps to 0.40% and US Treasuries +3.7bps to 2.17%. As for the Fed, abating concerns around Hurricane damage and reports that the debt ceiling up for negotiation in December could be practically pushed into January due to emergency funding mechanisms has seen the OIS market pricing in a 47% chance of a December rate hike, up from Friday’s 33% chance.

Also supporting yields were comments on US tax reform by Treasury Secretary Mnuchin. He reiterated his confidence in getting tax reform done by the end of the year: “we’re going to get this done” and the administration is “super focused”. However, he also noted that the corporate tax rate is unlikely to be cut to 15% from the current 35%: “I don’t know if we will be able to achieve that, given the budget issues” “But we’re going to get this down to a very competitive level”.

Economic data was sparse but US releases continue to reinforce strength and hint towards an eventual lift in wages growth. The NFIB index rose to 105.3 from 105.2 and above the consensus of 104.8. Hiring plans remain elevated (18 v its average of 11 in 2016), while the % of firms reporting higher worker compensation rose to 28 (it averaged 24 in 2016). The number of job openings also rose to a new all-time high of 6,170k while the quit rate rose a tenth to 2.2%

Coming Up

It’s a quiet day coming up in terms of data. Domestically we get the W-MI Monthly Consumer Confidence index. While normally not market moving, analysts will be paying attention to see whether Consumer Confidence lifts towards Business Confidence. NAB’s recent analysis into Consumer Confidence has found that elevated unemployment and low wages grow can almost fully explain the current subdued level of consumer confidence, while there also appears to be a non-mining/ mining divide (email Tapas.Strickland@nab.com.au if you would like a copy of the report).

Internationally it is quiet. The UK has Unemployment figures (6.30pm AEST), Europe has Industrial Production (7.00pn AEST) while it is all quiet in the US. Germany also has a final version of August CPI which is expected to be unchanged at 1.8% y/y.

The UK Unemployment figures will be the most market sensitive, especially given yesterday’s higher than expected inflation figures. The market looks for an unchanged unemployment rate at 4.4% and employment growth of 150k (3m/3m), up from 125k last month. The wages figures will also garner attention with the market looking for a 2.3% y/y pace, up from 2.1% in July.

Finally, the IEA releases its latest oil market report while UK Chancellor Hammond speaks at a dinner in London.

Overnight

On global stock markets, the S&P 500 was +0.34%. Bond markets saw US 10-years +3.66bp to 2.17%. In commodities, Brent crude oil +0.80% to $54.27, gold+0.0% to $1,332, iron ore +2.5% to $76.37, steam coal +0.2% to $99.75, met. coal +3.0% to $206.00. AUD is at 0.8021 and the range since yesterday 5pm Sydney time is 0.7998 to 0.8049.

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