All eyes on US CPI

The S&P 500 hit its 44th record this year on Wednesday, Nasdaq 100 closed above the 20’000 mark. The Dow Jones index advanced 1% to an almost ATH, while investors were less enthusiastic regarding the small stocks, the Russell 2000 gained 0.26%. Over in Europe, the Stoxx 600 was better bid, the FTSE 100 recovered a part of the previous day’s China related losses. In China, the bleeding in the CSI 300 stopped and the index jumped close to 3% in the Asian session on hope that the new government briefing on fiscal policy due Saturday will bring the kind of stimulus measures that investors are happy with. Xi’s government probably understood this week that anything less than absolutely-mind-blowing wouldn’t do as we are celebrating the fourth year of the crackdown on the country’s big technology companies. Alibaba was trading near $300 a share in October 2020, and now hardly above $100. China has a long ways to go to bring investors back on board and it must deliver to restore appetite. Confidence is another story...

But anyway, market sentiment isn’t bad; copper, iron ore and US crude are better bid today. The barrel of US crude tipped a toe below the 50-DMA and below a major Fibonacci support yesterday but rapidly rebounded on the back of ongoing geopolitical tensions and despite a 5.8-mio barrel build in US oil inventories last week. The geopolitical risks remain tilted to the upside, and the excitement that China could announce a nice fiscal stimulus package this weekend, will likely throw a floor under any weakness in oil prices into the weekend.

Elsewhere, European futures are up and US futures are flat at the time of writing. The Federal Reserve (Fed) minutes released yesterday showed that there has been some pushback to the Fed’s 50bp cut last month, as some members thought it would be more reasonable and cautious to start with a 25bp cut. But most preferred to rush to the exit – a possibly premature decision that could justify a month of pause from the Fed to rectify the overly dovish move in November? We will see that. The probability of a no cut is gently creeping in. That probability now stands at 15% ahead of the upcoming US CPI data, and has further room to mature if the economic data continues to defy the slowdown expectations in the US.

All eyes on US CPI

Even though the Fed members’ shifted their attention from inflation to jobs, inflation is still important. As some Fed members say, the risks are probably roughly ‘in balance’ right now. That means that any uptick in US inflation could reshuffle the Fed expectations, and the market pricing attached to them. Headline US inflation is expected to have eased from 2.5% to 2.3% in September, but the core inflation likely remained sticky above 3% - and wages grew at 4% last month, meaning that the Fed is getting closer to its destination, but it is not there just yet. And the last mile could – and would in theory – require an undesired weakness in the jobs market to stabilize inflation near the 2% level. That’s what the good, old Philips curve suggests.

But anyway, the reasoning goes as usual.

• A CPI data in line with expectations, or ideally softer-than-expected, will keep the expectation of another rate cut from the Fed in November alive.

• We will unlikely see a data soft enough to boost the expectation of a 50bp cut – that expectation is rather boosted by the weakness of jobs data and the latest jobs data was too strong to hold on to it. Atlanta Fed’s GDP Now is now pointing at a growth of more than 3% in the US in the Q3 and that’s not the kind of number that would back another 50bp from the Fed. a sufficiently soft inflation figure will keep the expectation of another rate cut on the table for November.

• A stronger-than-expected CPI read could further revive the worries that the Fed may have declared victory over inflation prematurely and boost the bets that it should wait in November to rectify its jumbo cut decision.

What’s easier with inflation – unlike with jobs data – is that a stronger-than-expected inflation is no good news for no one. Therefore, if today’s data isn’t soft enough, we could see the US yields and the dollar extend gains, and the major US indices refuse to renew record. Otherwise, the US dollar’s nascent bullish trend will be questioned and the major US indices will have reason to opt for another fresh high.

In numbers

The US dollar index pushed above its major 38.2% Fibonacci resistance on summer decline, near 102.50, yesterday, and is awaiting the inflation print having stepped into the medium-term bullish consolidation zone. The EURUSD sank below its own major 38.2% retracement on summer rebound and is now consolidating in the medium-term bullish consolidation zone. The USDJPY also traded past its own major 38.2% Fibonacci resistance, near 148.10 level, last Friday and is preparing to test the 150 offers. If the US inflation data is not soft enough, the USD bulls are already in a mood to push the dollar rally further.