Nasdaq, S&P rally, Oil prices maintain highs

This week’s inflation report is centerstage, with the Nasdaq and S&P 500 rallying on the belief that the report will be benign and the Fed won’t raise interest rates next week. The oil price is hovering around $88 as we await new data on the supply/demand balance.

September 11 – 9-11; May the memory linger and may we never forget. This is a somber day in American history as it struck at the heart of Wall Street.

Bottom-line: risk-on.

TODAY’S MAJOR NEWS

Big data week, inflation centerstage

This is a big week for economic data ahead of the next Fed interest rate decision on September 20^th. We get consumer price data on Wednesday, producer price and retail sales data on Thursday. Inflation could surprise. August saw much higher gasoline prices at the pump. As such, the market expects month-on-month headline inflation to be up 0.6%, and year-on-year to be up 3.6%. The Fed’s favored metric, core inflation excluding food and energy prices, is expected to remain unchanged at 0.2% month-on-month, dropping to 4.4% year-on-year. Doves will ignore energy prices, saying that it’s the “core” inflation data that matters; hawks will argue that commodity inflation was a major contributor to the inflation post-Covid.

Wage inflation entrenched

Inflation hawks argue that labor shortages continue to be a problem keeping us above the 2% inflation mandate. While we are seeing an easing of job market conditions, largely due to employers slowing their hiring, they’re still adding 150,000 jobs per month, exceeding the 100,000 natural increase in labor supply due to population growth. Employers are not laying off many employees, recognizing how hard it’s been to fill positions, offering sufficiently attractive pay raises to hang onto good employees at all costs, contributing to wage inflation. This outlook is reinforced by the belief in soft landing.

Nowcast calls for inflation spike

• The Cleveland Fed’s inflation forecast, or ‘Nowcasts’, is calling for a sharp spike in the month-on-month inflation
• August CPI is expected to rise 0.8%, in part due to gasoline prices moving up over 6% month-on-month in August
• Stripping out food and energy, core CPI is estimated to be up 0.4% month-on-month
• It’s worth noting that in recent months, Nowcast estimates have tended to overstate actual CPI inflation, despite a relatively robust long-term forecasting record

Oil prices in the balance

• The oil price continues to hover around $88 as the extension of OPEC+ supply cuts continue to dominate, but monthly reports from the IEA and OPEC will provide insight on the supply and demand balances as we enter Q4
• On Friday, the Baker Hughes oil rig count rose for the first time in three months (by one to 632 active rigs), which indicates that there might be further rises in output over the coming months
• For reference, the rig count is currently down by 127 rigs, from 759 rigs, a year ago
• However higher oil prices could boost the rig count could rise above 700 in 2024

Chinese loans picking up, but it’s a mixed message

• New loans rose to 1.36 trillion yuan in August ($186 billion), ahead of expectations, and up from 346 billion yuan ($47.4 billion) in July – up 8.8% year-on-year
• For businesses, middle- to long-term loans to businesses totaled 644 billion yuan ($88 billion), down 12.4% year-on-year, and the second month of contraction following a decline of 21.6% in July
• Businesses remain reluctant to take on more debt, despite all the talk of incentives, and despite the cheap money being offered
• For homeowners, middle- to long-term loans increased by 160 billion yuan ($22 billion) in August, bouncing from a negative growth of 67.2 billion yuan in July – still 40% lower than the previous year’s pace
• China recently provided incentives for buying homes, including lower interest rates and lower down payment requirements that produced a short-term surge in home buying – we will have to see if that momentum will be sustained sufficiently to bail out its property market

TODAY’S MAJOR MARKETS

Nasdaq, S&P continue to rally

• Equity markets continued to recover from last week’s swoon, with a 1.0% rise in Nasdaq, 0.6% in the S&P 500 and 0.5% in the Russell 2000
• European markets were mixed overnight, with the FTSE 100 and Dax up 0.4% and 0.3%, respectively, while the Nikkei 225 saw further profit taking and was off 0.4%
• The VIX, Wall Street’s fear index, was unchanged at 13.8

Bond yields rise modestly

• 2-year and 10-year bonds edged up to 4.98% and 4.29% respectively
• The dollar index was off 0.5% at 104.5
• Versus the dollar, the Yen fell 0.4%, while Sterling and the Euro both rose 0.4%

Silver rallies, Oil holds highs

• Crude oil prices rose 0.2% to 87.6 per barrel
• Spot gold prices were up 0.2% at $1,947 per ounce, while silver was up 0.9% at $23.4 per ounce
• Grain and oilseed markets are mixed. Wheat prices fell to fresh lows for the move in Chicago and Kansas City on cheap Russian wheat continuing to hit the world market at a record pace, and weak demand for US wheat at current prices
• Corn and soybean prices were mixed to firm as traders anticipated USDA lowering its yield estimates in tomorrow's big crop report

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected] 

Market outlook by Paul Walton, Financial Writer: [email protected]