Oil extends sell-off, Russell 2000 turns down on inflation data

The broadly based Russell 2000 turned around after a strong morning open when factory gate prices disappointed. Inflation seems stuck in the economy, an ominous warning ahead of tomorrow’s CPI data. Oil prices continued to slide, returning to the upper end of its previous trading range. Fed governors issued dovish interest rate speeches, hoping that rates have peaked.

Bottom line: risk-off.

TODAY’S MAJOR NEWS

Wholesale prices rose more than expected, tomorrow’s CPI data might surprise

Factory gate, or ‘wholesale,’ prices surprised markets this morning, rising at the fastest pace since April, suggesting that inflationary prices are stuck in the economy. Traders are looking ahead to tomorrow’s consumer price index (CPI) data, which they believe will again provide encouragement for the Federal Reserve to pause, if not pivot its monetary policy, even though expectations currently have core inflation above 4%.

Tomorrow’s CPI inflation is forecast to fall to 3.6% annually from 3.7% last month, while core CPI inflation (ex-food and energy) is forecast to fall to 4.1% from 4.3%. If this number disappoints, traders could reassess the view that short rates have peaked.

• Today’s headline producer price index (PPI) for September rose by 2.2% annually, ahead of the 1.6% forecast, and 2.0% in August
• On a monthly basis, headline PPI rose 0.5% compared to 0.7% last month
• Core PPI, ex-food and energy, rose by 2.7% annually, ahead of the 2.2% forecast and a shade slower than 2.9% in August
• On a monthly basis, core PPI rose 0.2% compared to 0.3% last month
• Wholesale energy prices surged 3.3% from August to September, as oil prices rose, and food prices rose by 0.9% over the month

Higher long rates could mean no further short-rate rises, but Fed minutes suggest otherwise

Two Fed officials reinforced the notion that the surge in long rates, now 4.6%, diminished the need for further short-rate rises. However, minutes of the September Federal Open Markets Committee (FOMC) suggest otherwise.

Higher bond yields have pushed up mortgage rates, crimped consumer spending, and raised business borrowing costs, dampening their expansion plans. Jerome Powell ally Philip Jefferson said today that he would “keep that in mind (higher bond yields) as I assess the future path of policy.” Lorie Logan, Federal Reserve Bank of Dallas president and a Fed’s rate-setting committee voting member, also said that higher bond rates helped serve the bank’s efforts to bring down inflation.

To complicate matters, a majority of Federal Reserve officials believed one more interest rate hike would "likely be appropriate" according to minutes of the last FOMC meeting released this afternoon. "A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted," the minutes read.

So, interest rate policy and a peak in rates remains unclear.

Bank sector earnings could disappoint, shares reflect the bad news

JPMorgan Chase kicks off US bank earnings per share (EPS) on Friday, but a consensus estimate for 25% earnings growth could be a stand-out in a sector mired in problems. According to broker estimates, Goldman Sachs, Citigroup, and Morgan Stanley are expected to report the most significant quarterly EPS declines of 35%, 25% and 15%, respectively. Higher long rates are anticipated to hit banks' funding, lending, borrower's loan repayments, security division losses, and increased capital requirements. Arguably, this bad news is already discounted in bank share prices: the KBW Bank Sector index is down 25% year-to-date, 0.5% today.

TODAY’S MAJOR MARKETS

Russell 2000  leads equitysell-off

• The Russell 2000 led markets lower after its recent rally, down 0.7% in early afternoon trading, with the S&P 500 off 0.1% and Nasdaq up 0.2%, respectively
• Foreign markets were mixed overnight, with the Nikkei 225 up 0.6%, the Dax was up 0.2% and the FTSE 100 was down 0.1%
• The VIX, Wall Street’s fear index, was pretty unchanged at 17.3

Short-rated bond yields rise

• 10-year yields fell to 4.62%, while 2-year yields rose to 5.02%
• The dollar index was unchanged at 105.9
• Versus the dollar, the Yen fell 0.4%, the Euro fell 0.1% and Sterling was unchanged

Oil resumes selling pressure

• Crude oil prices fell 2.1% to $84.2 per barrel, moving back to the upper end of its $66-$84 trading range
• Spot gold prices rose 0.6% to $1,887 per ounce, while silver rose 0.8% to $22.1 per ounce
• The grain and oilseed sector was mixed to mostly weaker ahead of tomorrow's critical USDA crop report

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

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