The Overnight Report: Bad US CPI Surprise

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Trends do not move in a straight line, but that’s not necessarily what markets want to hear when valuations are elevated, and indices are near all-time highs.

The overnight session saw US September CPI printing a stronger-than-expected 0.2% m/m (2.4% y/y) with core up 0.3% m/m (3.3% y/y).

But also: the Fed’s Bostic said he’s open to skipping a cut at one of the Fed meetings this year, while US initial claims in the latest week (5 Oct) rose 33k to 258k, the highest since August 2023.

US equities responded with weakness, as expected, but still managed to keep losses limited.

World Overnight
SPI Overnight	8256.00	– 3.00	– 0.04%
S&P ASX 200	8223.00	+ 35.60	0.43%
S&P500	5780.05	– 11.99	– 0.21%
Nasdaq Comp	18282.05	– 9.57	– 0.05%
DJIA	42454.12	– 57.88	– 0.14%
S&P500 VIX	20.93	+ 0.07	0.34%
US 10-year yield	4.10	+ 0.03	0.71%
USD Index	102.87	– 0.03	– 0.03%
FTSE100	8237.73	– 6.01	– 0.07%
DAX30	19210.90	– 44.03	– 0.23%

By Chris Weston, Head of Research, Pepperstone

Good morning.

Asia looks set to open the final day trade of the week unchanged from the prior session close, although a modest last-hour rally in the S&P500 could offer some tailwinds.

Traders will be keen to position portfolios for another weekend of potential gapping risk, with market players looking to adequately price expectations for Saturday’s presser from China’s MoF.

Any sanguine open for the HK50 and CHINAH is unlikely to last long, as these markets remain volatile, and one can assume that will again be the case through trade today.

US data did get some focus from traders, and promoted some initial intraday volatility, with US core CPI coming in modestly hotter than the analysts’ consensus at 0.3% m/m (3.3% y/y), although the market was positioned for this upside surprise, guided by where CPI fixings were implying.

At the same time, US initial jobless claims jumped higher to 258k, and while this rise occurred in some of the Southeastern states affected by Hurricane Helene, we did see a 19k rise in claims in states such as Ohio and Michigan that weren’t weather impacted. So, in all, it was a messy result for the market to digest.

The net effect of the data was an initial move lower in US 2yr Treasuries, which, in turn, modestly weighed on the USD, while also bringing out sellers in S&P500 futures.

Comments from NY Fed president Williams that he is “increasingly confident inflation is getting under control” was somewhat reassuring for risk, although there was some offsetting factor from Fed member Bostic’s remarks in the WSJ that he is “keeping the door open to skipping a rate cut in November” a factor that won’t surprise too many who observe the Fed’s recent dots.

The US 2yr closed -6bp lower at 3.95%, with US interest rate swaps pricing around -20bp of cuts for the November meeting, and -44bp of cuts for December.

Crude (+3.1%) has been the standout market for those who gravitate towards intraday movement, with Brent crude and gasoline futures having a solid intraday trend day, with one-way buying flow seen from the start of US trade.

Defiant rhetoric from Israel’s Defence Minister keeps the market on edge for retaliation, and traders while increasingly fatigued from watching headlines know that breaking news that could ramp up the probability of an Iranian crude output being disturbed is still very much in play. One could argue that the gold market is finding support for this dynamic.

 As we look towards the final session, traders once again consider the possibility of gapping risk driven by weekend news flow.

Geopolitical headlines remain a threat, and we also hear from China’s MOF on Saturday, where we expect further colour on fiscal rollout, although expectations for real substance will remain in check, as we all saw how sky-high expectations into the NDRC’s press conference earlier this week resulted in some extreme unwinds of long positioning.

US PPI is also due, and the outcome here will galvanise expectations for the core PCE inflation print due on 31 October.

Equity and US index traders will have JP Morgan, and to a lesser extent Wells Fargo and Blackrock on their radar, with earnings dropping in pre-market trade.

The options market sees an implied move in JPM on the day of -/+3.4%, which suggests some upbeat movement in this well-held name, and longs will want compelling guidance that pushes price back above US$220. 

On the calendar today:

-New Zealand Sept PMI

-UK Aug Industrial Production

-UK Aug trade balance

-UK GDP

-US Oct U of Michigan Sentiment

-US Sept PPI

-Boss Energy ((BOE)) AGM

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

Corporate news in Australia:

-De Grey Mining ((DEG)) to secure a 50% JV interest in Novo Resources’ ((NVO)) Egina gold project

– Companies owned by private equity firms are landing in default more frequently than other speculative-grade borrowers, according to a report from Moody’s Ratings.

Spot Metals,Minerals & Energy Futures
Gold (oz)	2647.15	+ 20.95	0.80%
Silver (oz)	31.37	+ 0.65	2.12%
Copper (lb)	4.45	+ 0.03	0.77%
Aluminium (lb)	1.17	+ 0.02	1.81%
Nickel (lb)	4.56	0.00	0.00%
Zinc (lb)	1.39	+ 0.03	2.24%
West Texas Crude	75.62	+ 2.22	3.02%
Brent Crude	79.06	+ 2.25	2.93%
Iron Ore (t)	105.81	– 0.72	– 0.68%

US Inflation (CPI) by Quasar Elizundia, Expert Research Strategist at Pepperstone

In an interesting, though not radical, turn, the narrative around the US economy has taken on more complex tones, with data catching attention on both inflation and labor fronts.

The September inflation reading surprised markets with figures that exceeded expectations across the board, generating a subtle yet important shift in monetary policy expectations.

Annual headline inflation decelerated for the sixth consecutive month, reaching 2.4%, slightly above the projected 2.3%.

However, the biggest surprise came from core inflation, which, for the first time since Q1 2023, showed acceleration, reaching 3.3% annually, compared to the expected 3.2%.

This increase reflects persistent inflationary pressures in key sectors, posing a significant challenge for monetary policymakers.

This shift in the inflation profile was accompanied by a rise in initial jobless claims, which reached 258,000, the highest level in 14 months.

Although this metric tends to be volatile, the unexpected rise introduces a new layer of uncertainty to the economy, especially after the solid September NFP data, which had painted a more favorable picture of the labor market.

The impact on markets was immediate. US equities showed average declines of -0.2%, reflecting investor concerns about the uncertain economic outlook.

Additionally, expectations around the Federal Reserve’s next monetary policy decision in November have shifted significantly.

Following the latest data, the probability of a -25-basis-point cut has risen to 88%, compared to the previous 80%. This shift balances concerns that the labor market may not be as strong as suggested by last week’s NFP data, and the possibility that inflation may be more persistent than previously thought.

Regarding the composition of inflation, energy prices continued to decline (-6.8%), driven by a sharp drop in gasoline and heating oil prices, which has eased the cost of living somewhat.

However, food and transportation costs continue to exert upward pressure, with increases of 2.3% and 8.5%, respectively. This imbalance between inflation components adds complexity to the Fed’s task of stabilising prices without severely impacting economic growth.

In summary, the US economy is showing mixed signals, with a labor market that remains relatively resilient, but with areas of uncertainty, and inflation that could prove more persistent than expected.

These data reignite the debate between a “soft landing,” a “no landing,” and the possibility of a “hard landing,” though the latter remains more distant for now.

The Australian share market over the past thirty days

Index	10 Oct 2024	Week To Date	Month To Date (Oct)	Quarter To Date (Oct-Dec)	Year To Date (2024)
S&P ASX 200 (ex-div)	8223.00	0.90%	-0.57%	-0.57%	8.33%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
APA	APA Group	Downgrade to Sell from Neutral	UBS
DRO	DroneShield	Downgrade to Hold from Buy	Bell Potter
GNC	GrainCorp	Downgrade to Hold from Buy	Bell Potter
LTM	Arcadium Lithium	Downgrade to Hold from Buy	Bell Potter
MFG	Magellan Financial	Upgrade to Neutral from Underperform	Macquarie
NAB	National Australia Bank	Downgrade to Reduce from Hold	Morgans
SHV	Select Harvests	Upgrade to Accumulate from Hold	Ord Minnett

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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