Chinese CPI rises to 2% Y/Y

The Day So Far

Equities across the board are reeling from the strong sell-off in US equities into yesterday’s close as the S&P fell 60 points from the highs, led by crude which fell almost $3 on global growth concerns and ahead of the API inventory release after the US close. Overnight, Chinese CPI came in a 2% y/y, slightly ahead of expectations and perhaps allaying about slowing growth and consumer demand in China but it is also a far cry from the 6%+ inflation seen in 2010. Inflation globally has trended lower generally in line with falling commodities; this is despite the best efforts of central bankers over the past 7 years. The notable absentee from the risk-off moves yesterday was T notes, probably a reflection of traders unwillingness to heavily bid up fixed income before the Fed next week, so do not expect a big correlated move up in US Treasuries if equities continue to come under pressure.

The Afternoon View

For now though, the Fed takes the backseat as we look ahead to the Bank of England rate decision and meeting minutes to be released today for the 2ndtime since the BoE decided to change how it delivers its communications. Sterling has traded strongly today, recently finding resistance at the 1.54 handle. Since the previous minutes, UK employment and manufacturing data has weakened along with inflation expectations, so it will be a major surprise if the BoE strikes a hawkish tone.

Elsewhere, we have the BoE crude oil inventories this afternoon, with crude recovering somewhat this morning alongside equities. Crude, and commodities in general, remain fragile as global growth fears and oversupply in the US have combined to keep WTI below $50 for much of this year and we see little sign of this changing until either the dollar weakens significantly or the supply bottlenecks in refineries across the world start to unwind. A global economic recovery would certainly help too, but in the short term we maintain our short bias in crude, last night’s API release showing another build in supply of 2.1 million barrels. The expectation for today is for a more modest build of 250K, which is likely to be crushed if last night’s API release is anything to go by and we are looking for shorts from just above the $45 handle. Look to equities as well, the crude/ S&P positive correlation coming to the fore yesterday.