Hot inflation and claims data weigh on stocks

US stocks are lower after hot inflation and claims data kept the risk of more Fed rate hikes on the table.  The labor market refuses to break and that will keep supporting the Fed’s ‘higher for longer’ stance on rates.  Wall Street is buying up safe-haven trades that include Treasuries, the dollar, and mega-cap tech and oil stocks.  

King dollar is ready to give up the crown until Wall Street is confident that the Fed is done raising rates. ​

CPI/Claims

The US inflation report came in a little hotter-than-expected. Inflation is still coming down and that should allow the Fed to stay on the ‘higher for longer’ course. Despite the geopolitical risks that are impacting energy prices, refiner margins have lowered and that should support limited upside with next month's report. Hotel rates (lodging) rose 3.7% and that is a key driver to why shelter prices rose. The calculation of core services prices excluding shelter rose 0.6% from a month ago, which was the largest increase in a year. 

Wall Street was expecting a firm CPI print given the hot PPI reading, but this report will keep the risk of one more rate hike on the table.  The rise in yields will likely last given pricing pressures will keep most of the Fed hawks leaning towards further policy tightening. 

Weekly jobless claims held steady at 209,000, as states impacted by the UAW strike saw minimal increases in claims.  The labor market is slowly softening as continuing claims rose to the highest levels in seven weeks. 

Soft landing hopes remain intact as core disinflation continues and as the labor market gradually weakens. 

Oil

The latest round of US economic data doesn’t quite support the demand destruction driven selloff that has been building over the past couple of weeks.  As geopolitical risks raise the chances that supply/demand flows could see disruptions, crude prices should remain supported throughout the rest of the year. 

Oil prices pared gains after a somewhat hot CPI report suggested the Fed might not be done raising rates.  A strong dollar emerged and that put some pressure on commodity prices.  The oil market is going to remain tight going forward and should see the mid-$80s provide major support.  The risks of strong enforcement on Russian oil price caps or potential deepening of sanctions of Iranian crude will likely keep this oil market tight throughout the winter. 

Crude oil surprisingly didn't drop after the EIA reported a large 10.17 million barrel build as gasoline and distillate demand strongly rebounded. ​ ​ Cushing stockpiles however dropped to the lowest levels since July 2022. ​ Crude production also rose by 300,000 bpd, which was expected. ​

Gold

Profit taking hit gold after a hot inflation report reinvigorated the bond market selloff.  Fed rate hike fears are back on the table but that doesn’t mean they will hike rates before the end of the year.  Core disinflation is cooling and expectations are for a softening economy should keep the disinflation process on track. After the CPI report, gold traders quickly realized that gold wasn't going to rally above the $1900 level.  Gold's short-term outlook still remains bullish given the US growth is quickly cooling and over all the uncertainty with all the geopolitical risks. 

Crypto

Bitcoin traded softer after a hot inflation report.  As the cryptoverse awaits updates with a US bitcoin ETF approval, China appears to be leading the race for central bank digital currency (CBDC) adoption.  A leading Chinese official suggested CBDCs could be used as an interest-bearing store of value and not just used for settlement.  If the digital yuan is able to pay interest on account balances, that could easily become a new requirement for all other CBDCs.  If CBDC adoption becomes clearer across the advanced economies, that could deter some of the long-growth calls for Bitcoin.