Nasdaq, S&P 500 turn down after early rally on better inflation news

Equity markets erased early morning gains, notably the Nasdaq being unchanged by lunchtime after a 0.6% rally. Traders cheered better than expected inflation data and less weakness than expected in a consumer sentiment survey. Bond yields fell marginally. The dollar was unchanged. Oil saw continued profit-taking.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Core consumer inflation falls, but is it enough for the Fed?

The core Personal consumption expenditures (PCE) price index excluding food and energy is often call the Fed’s favorite inflation – this morning’s data was better than expected. This prompted an early bullish mood on Wall Street. Core inflation stripping out higher energy prices is continuing to cool. Yet at an annual 3.9% rate it’s still twice the mandated 2% level.

Central bankers face a dilemma: will the rate of inflation keep declining, notably as higher oil prices permeate throughout the economy?; and, will it continue to move in the right direction if consumer’s perceive that rates are about to fall? Throw in the economic impact of a government shutdown, the UAW labor strike and rapidly expanding national debt pushing interest rates higher and there are no simple answers. Hence the Fed’s new mantra, that rates will still ‘higher for longer’ until inflation is back at 2%.

• The core PCE price index excluding food and energy rose 3.9% year-on-year in August, matching analyst expectations, down from the 4.2% seen in July
• The core PCE price index rose just 0.1% month-on-month in August, less than 0.2% seen last month
• The headline PCE price index rose 3.5% year-on-year in August, matching analyst expectations, but up from 3.3% in July
• Headline PCE price rose 0.4% month-on-month in August as gasoline prices surged, above 0.2% last month
• Personal income rose 0.4% month-on-month in August, matching analyst expectations, up from the 0.2% gains seen in July
• Personal consumption expenditures were also up 0.4% month-on-month in August, notably slower growth than the 0.9% growth seen last month

Consumer sentiment weakening over the summer

Today's modestly better University of Michigan consumer sentiment survey data, down less than expected, contradicted Tuesday’s Conference Board report. That report showed more strength in the current conditions, while the outlook deteriorated; this survey showed the opposite, which may be a product of survey timing. Consumers in the Michigan survey commented on the uncertainties of a possible government shutdown, as well as the UAW strike, weighing on their longer-term outlook.

• Consumer sentiment firmed from its mid-month preliminary data, posting a 68.1 for September, up from the preliminary reading of 67.7
• That’s still down from 69.5 in August, but notably higher than the 58.6 registered a year ago.
• The current economic conditions index for September came in at 71.4, down from 75.7 in August, but up from 59.7 the previous year
• The index of consumer expectations rose to 66.0, up slightly from 65.5 the previous month, and up from 58.0 the previous year

The ‘partial’ government shutdown could bring greater market volatility

A partial government shutdown appears imminent. The House of Representatives is working on twelve appropriation bills to fund the government – the proper way to do things – providing transparency to a fiscal budget process. However, House leadership started the process too late and there is no way that all 12 bills can pass the House and Senate. Short-term stopgap funding bills are being considered to keep the government open, but they can’t be agreed.

As such, a partial shutdown is expected. Government workers will be without paychecks, another drag on the economy. Essential services will continue, but not the regular provision of economic data – leading to uncertainty and increased market volatility. Eventually a deal will be agreed and life will return to normal (as it always does), hopefully before a credit rating agency uses the dysfunction to downgrade US sovereign debt.

Bigger wheat crop

The US Department of Agriculture (USDA) surprised grain markets in today’s report, showing a bigger wheat crop than expected, larger soybean stocks, and smaller corn stocks. It started by cutting the size of last year's corn and soybean crops by 15 million and 6 million bushels respectively. This year's all-wheat crop came in at 1.812 billion bushels, up 89 million bushels above the August report, with increases in nearly class except white winter wheat.

TODAY’S MAJOR MARKETS

Nasdaq-led ally fizzles out

• Equity markets fell back sharply after a morning rally sparked by today’s inflation news, led by a 0.6% fall in the Nasdaq, 0.5% in the S$P 500 while the Russell 2000 was unchanged
• Foreign markets also were mixed, with the Nikkei 225 and FTSE 100 unchanged, while the Dax was up 0.4%
• The VIX, Wall Street’s fear index, was unchanged at 17.3 on the day

Dollar flat, bond yields edge down

• 10-year yields traded down to 4.56% and 2-year yields fell back to 5.05%
• The dollar index was unchanged at 106.6
• Versus the dollar, Sterling, Euro and the Yen were all unchanged

Oil land gold weak

• Crude oil prices fell 0.7% to 91.1 per barrel on profit-taking
• Spot gold prices fell 0.4% to $1,872 per ounce, while silver fell 1.4% to $22.4 per ounce
• Grain and oilseed markets were mostly mixed ahead of today’s big USDA crop reports

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com 

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com