Brent slips below $70pb – Focus on US CPI

The barrel of US crude tumbled almost 4% to nearly $65pb level, as Brent crude slipped below the $70pb mark after OPEC – which is normally optimistic - lowered its demand forecast for the second time in two months. The API data also showed that the US oil inventories fell by another 2.79 mio barrels last week. As such, US crude has now hit the oversold market conditions, and the rapid selloff suggests that a minor correction would be healthy at the current levels. But the short-term outlook remains comfortably bearish, as the demand worries outweigh the supply side of the story. The price supportive factors like the geopolitical tensions, OPEC’s decision to delay the end of the production restrictions and a hurricane in the Gulf of Mexico go totally unheard. Little need to say that the energy sector had a rough session, yesterday.

Elsewhere, the debate between Trump and Harris went quite well for Harris, which saw her victory odds climbed to 55, and the latter sent Bitcoin 2.50% lower.

Big banks and big tech

Yesterday’s news suggested that US regulators would scale back the increase in capital requirements from 19% to 9%. But news were eclipsed by a conference where the big bank heads gave weak revenue prospects and gloomy outlook. JP Morgan’s CEO said that the $90bn estimate for its net interest income ‘is not very reasonable’ for next year. BoFA said that results for its investment banking will be lower than the Wall Street expectations. Goldman Sach’s CEO said that the bank’s trading revenue will likely drop 10% in the current quarter and Ally Financial warned that ‘credit challenges have intensified’ due to increasing auto loan delinquencies as borrowers faced higher borrowing costs. As a result, JP Morgan saw its share price drop more than 5%, and Invesco’s KBW bank ETF fell 1.83%.

Elsewhere, the European top court told Apple to pay Ireland €13bn in unpaid taxes - putting an end to an eight-year dispute, and Google lost its chance to overturn a €2.4bn fine for abusing its market dominance of its shopping comparison service. Google’s Alphabet didn’t really react to the news – its stock price gained 0.31%, while Apple lost 0.36%, but most of it was probably due to the unimpressive product reveal and insufficient AI promises that the company gave the day before. On the brighter side, Taiwan’s exports rose to a new record of $43.6bn in August thanks to the growing demand for AI chips – and the country’s finance ministry said that the exports should continue to rise steadily in the H2 thanks to robust AI demand. Nvidia advanced some 1.5% yesterday, but TSM gave no reaction to the news. To me, it looked like the continuation of the AI fatigue story.

Overall, the S&P500 still gained 0.45% yesterday, Nasdaq 100 jumped 0.90%, while the Dow Jones index closed with losses due to the bank selloff. The US 2-year yield plunged to 3.56% on rising worries regarding the economic strength and the US dollar gave back most of its advance since Monday. The USDJPY fell to the lowest levels since January as a Bank of Japan (BoJ) member said that the central bank will continue to adjust its degree of easing. Because the expectation is that the BoJ will likely wait until December or January to announce another rate hike, there is room for hawkish readjustment, but the 140 level will likely act as a decent support in the absence of a concrete action.

All eyes on US CPI

Today, all eyes are on the US CPI data. Adobe’s Digital price index printed the biggest drop on record in August for online grocery prices. According to their calculation, the online food prices fell 3.7% in August from a month earlier. Food consumption stands for about 8.6% for of the official inflation measure and is left outside of the core measure, but the decent drop fits the slowing economy and slowing inflation narrative. Combined with the falling oil prices, I would say that the direction for consumer prices looks somewhat clear. In numbers, core inflation - that excludes food and energy prices - is expected to have steadied near the 3.2% level but headline inflation which includes food and energy is expected to have eased from 2.9% to 2.5%. If that’s the case, we will see the headline inflation drop significantly below the 3% level for the first time since last summer. That would be another reason for the Federal Reserve (Fed) to stop worrying about inflation and to worry more about the weakening jobs market. Would that justify a 50bp cut instead of a 25bp cut in September? Hardly. Because announcing a 50bp cut in September would suggest that the Fed accepts to have fallen behind the curve, and they probably want to avoid that.