Inflation expectations have been the stock market's kryptonite for most of the year and these fearsome anxieties are 'live' again.
Eyes on CPI
After the most savage tech sector rout in seven years, the U.S. Bureau of Labor Statistics well and truly has the rapt attention of global markets ahead of August consumer price inflation readings. I'm holding off from seeing the release as the most critical pivot for risk this month. Those have probably passed after Fed policymakers inadvertently talked up Treasury mayhem last week, during one of the biggest government supply phases of the year (including $36bn on Wednesday). But Wednesday’s PPI surprise was like a final storm warning for many, so, here we are.
Nowhere to run but utilities
European shares are now on course for their worst week since early March as STOXX extends the day’s losses to 1.8%, after the main Asian indices saw the beginnings of true panic selling. Europe matches the U.S.’s technology sector rout, whilst adding regional flavour. The large Asia/EM-linked resource industry here also dumps 2%. Other worst hit gauges include those for large sectors like chemicals and oil & gas - as Michael morphs into a near-perfect storm. Banks are near the sharp end too after the right kind of rates ramp turned into the wrong kind. As seen Stateside, STOXX’s utility market is a relative haven, falling about 1%.
Italian bond success story
Europe’s own yield saga adds another deterrent for long position taking. Away from political headlines, Tesoro hit the top end of its range in a sale of €5.0bn-€6.5bn in new paper. The benchmark BTP/bund spread subsequently shows signs of a pause after touching the widest in five years earlier this week. Captive government bond buyers—banks—hoovered up Thursday’s supply, though at eye-watering yields. The successful sale weakened the benchmark BTP/bund spread around 4bp at one point, before Italian paper ran out of steam again. 10-year BTP was back near day highs around 360bp. A good sale was cold comfort for stock markets. And bigger risk events remain ahead.
One silver lining for currencies is a dollar setback, after U.S. President Donald Trump criticised Fed hikes as “crazy”. This benefits the euro most, as it picks up firm safety seeking flows from the greenback. The single currency is repeatedly running into offers in the high $1.15s, suggesting its outright strengths are limited. Dollar sellers also hit resistance as the yen broke back below 112 in the early hours. The greenback was briefly broke higher though looks on course for a sixth day of losses that should test ¥112 again. Sterling also sees haven demand building. Less so after a 170-pip run in 48 hours.
Core CPI is core anxiety
For the chief focus of the day, U.S. CPI, expectations are remarkably modest. Finer indications from weighted consensus still project 2.4% growth for the year-on-year rise and 0.2% in September, the same as mean forecasts supplied by main compilers. The monthly forecast projects the same rise as August, whilst the yearly outcome would retreat versus last month’s 2.7% if on target. These would be no revelation about how price growth is running. Even the core month-on-month measure would ordinarily need to crush 0.1% growth seen last month to qualify as a blow-out. It is forecast to rise to 0.2%. Still, it was an eye-catching 30 basis point advance to 0.4% by core monthly PPI that seemed to kick off the market turbulence. The risk that this signals unpredictable volatility in the inflation system is what’s keeping markets on edge.
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