Global indices made a solid start to the week. The EuroStoxx 600 closed yesterday 1.76% higher on news that the Ukrainians are doing well pushing back the Russians in territories they launched a counteroffensive, while the S&P500 and Nasdaq advanced more than 1%. The S&P500 even registered its strongest four-day rally since June, and recovered half of the August-September losses and that, even with the chatter that a rail strike in the US could put pressure on supply chains in the US in the coming days, and cost around $2 billion to the US economy, per day.
An eventual strike would disrupt the retail industry and weigh on the US retail giants and logistics companies profit expectations. But most US retailer & logistics stocks gained yesterday, as hope of seeing another soft inflation data in the US seems to be the major catalyzer of gains for the last couple of sessions. Add to that Janet Yellen’s words that the US could avoid recession, with ‘some good luck’. There is nothing to stop the bulls!
Today is the US inflation day
US inflation day is the new NFP day, as inflation is the data which has the biggest influence on Federal Reserve (Fed) expectations since the Fed declared war against inflation last year.
According to market estimates, the US inflation is seen easing toward 8.1% in August versus 8.5% printed a month earlier, and 9.1% peak printed the month before. A second month of soft inflation read has the power to soften the Fed hawks, and increase the bets of softer rate hikes beyond September.
Odds for September won’t change even with a significantly soft inflation read. The Fed is almost fully expected to raise the rates by another 75bp at next week’s FOMC meeting. What will happen after is, however, up to the data.
Therefore, as I said, a sufficiently soft, and ideally softer-than-expected inflation read today should keep the Fed hawks at bay, and give further support to the bullish action in equity markets, whereas a figure above expectations, or worse, a figure above last month’s read could snap the latest rally and send the stocks tumbling.
We are tilted toward a softer read than not, as the US house prices, and rents started falling, the wages stagnate, the Chinese producer prices pointed at a sharp retreat recently, the used car prices are down, and gasoline prices continue softening.
More importantly, inflation expectations in the US continue their steep fall. The New York Fed’s survey of consumer expectations showed about half a percentage point decline in August, the second biggest decline after July’s record-breaking drop.
Softer dollar, stronger euro
Hope of a soft inflation data is also what’s pulling the US dollar lower across the board. The dollar index tipped a toe below the 108 mark yesterday, while the EURUSD made an attempt above its 50-DMA, as news that Ukrainian troops are being successful in their counteroffensive attack, and chatter that voices are rising in Russia against the regime’s strategy in Ukraine, brought forward the possibility of Russia being defeated in Ukraine. This morning, the EURUSD consolidates above the critical 50-DMA, which stands at 1.010 mark. A softer inflation read in the US could cement gains above the 50-DMA. This is all we hope.
Likewise, Cable flirts with the 1.17 level, despite a softer-than-expected GDP read yesterday. The British economy grew just 0.2% last month, as industrial production shrank despite expectations of a slight expansion. And the outlook for the Q3 is rather dull. It’s said that just another day off for Queen Elizabeth’s funeral on September 19th is enough to tip the economy into recession.
We could still see sterling gain some territory against a broadly softer US dollar, if the dollar continues softening, but we now expect the euro to extend its advance against the pound toward the 0.88 level, last seen on February last year.
Elsewhere, the dollar-swissy retreated to 0.95 and the USDCAD slipped below 1.30, the Loonie being also boosted by firmer crude oil prices.
The American crude rallied more than 2% yesterday on improved market sentiment, and flirted with the $90 offers, without however being able to clear them. It’s possible we see an attempt above the $90 level in the next few sessions, if the risk rally persists across the broader markets.
