Nasdaq bounces back on inflation data

Mixed results in this morning's inflation data fed hopes of a rate hike pause on Wall Street, leading to cautiously firm stocks at midday, led by Nasdaq. Bond yields fell back after sharp increases on a first read of the inflation data. Futures markets put close to zero probability on a rate rise next week. Elsewhere currency and commodity markets were pretty much unchanged. Crude oil moved up to a 10-month high.

Bottom-line: risk-on.

TODAY’S MAJOR NEWS

Consumer Price Inflation (CPI) slightly worse than expected, but trends in right direction

Wall Street’s reaction to today’s inflation numbers was a “glass is half full”: a worse current outturn, but trending in the right direction stripping out energy prices. Core inflation running at an annual 4.3% pace is still way above the Fed’s 2% target.

Market expectations of future official interest rates, expressed in the CME’s Fedwatch tool, express an almost unanimous view that official rates will be unchanged at next week’s Fed meeting, but with just over 40% odds of one more rate hike in November. Rate cuts aren’t expected until the second quarter of next year.

We’ll see if tomorrow’s producer price index and retail sales data is able to change market sentiment heading into next week’s meeting.

• August’s headline CPI rose at an 3.7% annual rate, versus 3.6% expected, and above 3.2% in July. Higher oil, gas and petrol prices provided an explanation
• CPI rose 0.6% month-on-month, matching analyst expectations, but triple the 0.2% gain seen in July
• Core CPI ex energy and food prices was up 4.3% year-on-year in August, matching expectations, but down from 4.7% in July (an initial report that it was 4.7% was corrected)
• Core CPI rose 0.3% month-on-month in August, up from analyst expectations that it would remain unchanged at 0.2% gains
• The gasoline price index rose 10.6% month-on-month in August, with fuel oil up 9.1% on the month
• The energy complex rose 5.6% month-on-month, yet it still remains below year ago levels.
• The only real decline in prices in August to offset this big increase came from a 1.2% decrease in used car prices during the month, which are now down 6.6% year-on-year
• New vehicle prices were also up 0.3% on the month, reversing their recent trend toward discounts, suggesting that consumers are once again looking to trade in their used care for a new one
• Shelter price inflation continued to cool as well, slipping to 0.3% month-on-month gains, down from 0.4% the previous month

Energy complex stocks rising, but are below seasonal levels

• Commercial crude oil stocks rose 4.0 million to 420.6 million barrels in the week ending September 8, 2% below the five-year average
• Gasoline stocks rose by 5.6 million barrels, also 2% below seasonal levels
• Distillate stocks jumped by 3.9 million barrels, 13% below seasonal levels
• Ethanol stocks fell to a 21-month low 21.2 million barrels in the week ending September 8

TODAY’S MAJOR MARKETS

Nasdaq leads equity rally

• Equity markets rallied after the CPI print, with Nasdaq and the S&P 500 rising 0.5% and 0.3%, respectively, while the Russell 2000 fell 0.5%
• European markets were weaker overnight, with the Dax off 0.4%, the Nikkei 225 was off 0.2% and the FTSE 100 was unchanged
• The VIX, Wall Street’s fear index, fell to 13.5

Bond yields edge up

• 2-year and 10-year bonds edged up to 5.01% and 4.28% respectively
• The dollar index was unchanged at 104.7
• Versus the dollar, the Yen and Euro and Sterling were down 0.2%, while Sterling was unchanged

Oil rallies further

• Crude oil prices rose 0.2% to 89.0 per barrel
• Spot gold prices were off 0.1% at $1,932 per ounce, while silver fell 1.0% to $23.2 per ounce
• Grain and oilseed markets were mixed to higher, with follow-through short covering in wheat as it tries once again to set another bottom, while corn sees short covering after holding above the August lows
• Soybean prices see follow-through selling as they seek an area of chart support, after USDA cut demand in its forecast yesterday.

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

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