Rising US inflation concerns hang over risk appetite

• US futures edging lower, Asian equities mixed.

• Higher-than-expected CPI could weaken ‘team transitory’.

• Dollar, gold, stocks exposed to shifting expectations for Fed’s next move.

• Risk-taking hampered by significant headwinds.

US futures and European equities are edging lower while Asian stocks are mixed ahead of the keenly awaited release of today’s US inflation data. The dollar and oil benchmarks are paring recent gains, while spot gold is adhering to its month-to-date range.

The September CPI will be keenly watched as it portends to the Fed’s next move after next month’s presumed tapering of bond purchases. Persistently intense inflationary pressures, which have already prompted Atlanta Fed President Raphael Bostic to label the term ‘transitory’ as a ‘dirty word’, might force the central bank’s collective hand into hiking interest rates sooner than expected. Fed funds futures have already priced in a rate hike by December 2022, while half of the FOMC have also penciled in such an event for next year.

Should today’s official CPI print force more of ‘team transitory’ to abandon such ‘dirty’ thoughts, that could assist 10-year US Treasury bond yields with reclaiming the 1.60% mark and pushing the dollar index to fresh year-to-date highs. More signs of stubborn inflation could also force bullion to break to the downside and force spot prices back into sub-$1750 domain. It would also weaken the floor below equity markets.

If the headline CPI figures come in lower than the 0.3% month-on-month and 5.3% year-on-year forecasts, that would likely offer only limited relief to gold bugs, knowing that the Fed is still intent on unwinding its asset purchases in due course.

Outlook more important than Q3 earnings

The US earnings season is imminent and investors are likely to place more emphasis on companies’ forward-looking rhetoric rather than last quarter’s actual results. C-suite commentary about the duration of supply-chain woes and inflation’s persistence, and how these will impact pricing power and margins might hold bigger sway over the market’s immediate moves rather than backward-looking earnings.

Risk assets on wobbly legs

Risk sentiment currently appears as though it is lurching from one major test to another. The bull market should’ve enjoyed some reprieve from the better-than-expected China export data as well as US lawmakers having staved off the threat of a government default, at least until mid-December. Yet risk assets didn’t dare rejoice, fully knowing that major headwinds are still there to be dealt with, from the global energy crisis to stagflation fears to looming Fed tapering and policy tightening.

Overall, global equities are exhibiting a much larger propensity for declines rather than gains in the immediate future, with investors and traders grappling with more causes to worry rather than to cheer.