Market Thoughts – Wednesday 11th September – Conviction Lacking As CPI Looms

Today’s market analysis on behalf of Michael Brown Senior Research Strategist at Pepperstone

Digest – Trade was choppy, but ultimately risk-positive on Tuesday, albeit amid a distinct lack of conviction among market participants, ahead of today’s US CPI report.

Where We Stand – A choppy session for markets on Tuesday, though ultimately another where

‘no news was good news’ for equities, which eventually ended the day in the green, despite some indecision throughout the day, amid notable weakness in bank stocks after the Fed’s revised Basel III capital proposals. Conviction among market participants also seemed relatively limited ahead of today’s US CPI figures – even if, it must be said, the inflation print is no longer the key driver of monetary policy shifts that it was earlier in the cycle.

Yesterday’s data highlight came from the UK, in the form of the latest slate of labour market figures. Unemployment fell 0.1pp to 4.1% in the three months to July, its lowest level since January, while overall earnings rose 4.0% on an annual basis, its slowest pace in over three and a half years, as regular pay rose 5.1% YoY, its slowest rate in a couple of years. Of course, the usual caveats over the unreliability of the ONS’ labour market data must apply, with the data having been rather ropey for some time now, and BoE policymakers not placing too significant a weight on it.

As such, and with earnings growth likely still too hot for comfort for the more hawkish members on the BoE’s MPC, a September Bank Rate cut remains off the cards, with quarterly 25bp cuts still my base case, leaving November on the table for the next, and probably final, cut in 2024. Such an outlook is somewhat more hawkish than that foreseen from the ECB, and from the FOMC, where a 50bp September cut remains a possibility, and could underpin the GBP over the medium-run as a result.

The solid labour market figures couple well with a host of other resilient UK economic releases of late – headline inflation is, as near as makes no difference, at target; core CPI is running at a 3-year low; services prices at a 2-year low; the manufacturing PMI stands at a more than 2-year high; and, the services PMI has pointed to expansion for 10 straight months. All very solid, and far from the ‘worst economic inheritance ever’. Against that backdrop, for Government to claim that not cutting winter fuel payments, to save a measly £1.5bln from the public finances, would potentially cause a market crash and a ‘run on the pound’ is laughable, if not insulting.

Away from the UK, sentiment more broadly was again solid yesterday, with the S&P 500 and Nasdaq 100 both rallying once more, with the former notching its first back-to-back daily gains since the middle of August; albeit, with futures having pared around half these gains overnight.

Today’s CPI figure will be an important test for the nascent equity market rally, particularly if a cooler-than-expected print again leads markets to desire more easing than is likely to be delivered, at least in the short-term, with a 25bp cut at the September FOMC still the most likely outcome.

The FX space was, again, marred by choppy but ultimately quiet and largely directionless conditions, though some US session demand for the safe-haven JPY and CHF was notable, particularly as USDJPY surrendered the 143 figure once again. For the dollar, bulls will want to see the DXY test the MTD highs around 101.90, if not make a closing break north of the 102 figure, before becoming more convinced in the durability of the recent leg higher.

Crude, meanwhile, has been unable to make its own leg higher, and in fact found fairly chunky sellers once more, despite Tropical Storm Francine having become a hurricane, and barrelling towards a range of key oil – and gas – infrastructure on the Louisiana coast. The shutting-in of a range of platforms in the Gulf of Mexico has yet to cause any significant positive market impact, with focus for crude remaining primarily on the demand outlook which remains rather anaemic. Both Brent and WTI notched chunky declines yesterday, as the latter fell below $70bbl, a key psychological level, for the first time since December 2021. Any weather-related spikes in crude are likely to be sold into relatively rapidly.

In fixed income, gains were seen across the Treasury curve, with day highs printed after a solid $58bln 3-year auction, which started this week’s supply – including 10s today & 30s tomorrow – on a strong note. The auction stopped-through by a sizeable 1.7bp, a considerable improvement on the prior 6-auction average of an 0.1bp tail, and just the second in the last eight September 3y auctions which has stopped-through. Indirect demand, meanwhile, rose to a record high, likely in a rush among investors to lock in yields ahead of the Fed’s first cut of the cycle next week.

Overnight, the first, and so-far only scheduled, presidential debate between former President Trump and Vice President Harris has stolen plenty of headlines. Post-debate polls point to VP Harris having won the contest comfortably, though it feels far too early for markets to worry about the electoral noise and political hullabaloo just yet, and far-fetched to imagine that the last night’s televised pantomime will sway the decisions of too many undecided voters in the key swing states.

Look Ahead – Inflation is back at the top of the agenda today, with the August US CPI figures highlighting the data docket. Both headline and core prices are set to have ticked higher by 0.2% MoM, unchanged from the rate seen in July; meanwhile, on an annual basis, headline CPI is seen falling 0.4pp to 2.5% YoY, even as the core rate is set to hold steady at 3.2%. A print in line with consensus, for the headline gauge, would represent the slowest annual inflation rate since February 2021. CPI fixings, which have been remarkably accurate this cycle, point to headline figures of 0.11% MoM, and 2.50% YoY.

The degree to which any of this matters to financial markets is somewhat questionable, particularly with the FOMC already having established confidence in inflation returning towards 2%, and with developments in the labour market now the key determinant of the policy path. Only a significant deviation from consensus would likely kick-start a significant repricing of the USD OIS curve, which currently sees around a 70% chance of a 25bp cut next week – which, incidentally, remains my base case. A cooler print, however, also runs the risk of markets again moving to price more easing than they are likely to get, potentially posing some short-term headwinds to risk.

Elsewhere, today, the docket is light. UK GDP for July is due this morning, and should point to a relatively solid 0.2% MoM pace of growth, rebounding from the stagnation seen in June. US supply is also due, later on, with $39bln of 10-year notes to be auctioned, whereby expectations for a solid auction are likely high, after the well-received 3-year supply yesterday.