All Eyes On CPI

Where We Stand – Another relatively quiet day across the board, yesterday, with participants once more lacking significant data- or news-flow to get their teeth into, and with conviction still rather lacking amid ongoing tensions in the Middle East, and ahead of the September US CPI figures due later today.

That said, the dollar did continue to grind higher, with the DXY nearing the 103 handle, and trading to its best level since mid-August. The move came as markets continued to hawkishly reprice the Fed policy outlook, with the USD OIS curve now pricing just a 3-in-4 chance of a 25bp cut at the November FOMC meeting, and just 41bp of easing over the course of the remainder of the year.

While a hawkish repricing was justified after the stronger than expected September jobs figures, with 50bp cuts off the table for now, it seems like – yet again, as has happened so often this year – participants have gone too far to the other extreme. Policymakers are all-but-certain to deliver 25bp cuts at each meeting this year, and into the start of next, until the fed funds rate reaches a neutral level late next summer. Risks, then, to market pricing tilt to the dovish side, and by extension risks to the USD are tilted to the downside at this juncture. Perhaps a cooler than expected CPI print today will give the market a bit of a reality check.

That said, minutes from the September FOMC meeting released yesterday did point towards a somewhat more divided Committee than had previously been thought, with “some” officials – Fed code for 2-3 – having preferred a more modest 25bp cut last month. Given that Bowman was the only dissenter against a 50bp move, one logically assumes that these officials are non-voting members.

Elsewhere, Treasuries continued to sell-off across the curve, with 2-30 year yields rising as much as 3bp on the day, a combination of the above-mentioned hawkish repricing, though also after a soft-ish 10-year auction which tailed by 0.4bp. I must admit to being somewhat surprised as to the fact that buyers have not yet emerged at these attractive yield levels, though perhaps pre-CPI jitters are keeping bond bulls on the sidelines for now.

In the commodities space, gold continues to lose its shine, with the yellow metal yesterday extending its losing run into a 6^th straight day. In contrast to equities, which display a natural positive drift in the absence of fresh drivers, precious metals tend to be the opposite – needing a reason to rally, and drifting lower if one isn’t present. Gold has traded heavy for a while now, with pressure looking set to continue, particularly with a break under $2,600/oz likely to see more sellers enter the fray.

Speaking of equities, the S&P 500 rallied to a fresh record high yesterday, notching back-to-back gains for the first time in a couple of weeks, with the tech sector, proxied by the Nasdaq 100, again outperforming. I remain bullish, as I have done for the bulk of the year, though the start of Q3 earnings season on Friday does present a risk for the bulls to navigate. Nevertheless, with consensus EPS expectations having been downwardly revised by around 4% during the last quarter, there’s plenty of room for firms to deliver upside surprises, while the season should result in a 5^th straight quarter of overall earnings growth, leaving the bull case firmly intact.

Look Ahead – The week’s main event is finally upon us, with the September US CPI report due later on today.

Headline prices are set to have risen by 2.3% YoY last month, which would be the slowest annual rate of inflation since February 2021, while core CPI is set to have held steady at 3.2% YoY. While the core metric remains stubbornly high, there is likely to be little in the report to deter the FOMC from further easing, or to dent the ‘confidence’ that officials have in a return towards the 2% target over the medium-term. That said, the recent dovish repricing does leave scope for the dollar to pare gains, and bonds to pare recent losses, on a cooler-than-expected print.

Elsewhere, minutes from the September ECB meeting are likely to be a snoozefest, while the weekly US jobless claims figures will likely follow suit, being overshadowed by the CPI report, and with neither the initial nor continuing claims prints coinciding with the October NFP survey week.