Where do we go from here? Just as were hoping inflation may be cooling off a bit, the US CPI and inflation components of the Michigan Consumer Sentiment Index came in hotter than expected. This week, the UK, New Zealand, Canada, and Japan, will all get their chance to see if they have been able to control inflation during the month of September. In addition, markets will be paying close attention to the situation in the UK, where PM Truss ousted her Chancellor of the Exchequer, Kwasi Kwarteng. She is also giving up on some of her mini-budget proposals in order will satisfy the markets. But is it enough to keep her job? Also, earnings season kicks into high gear this week with continued bank earnings and the beginning of big tech names, including NFLX and TSLA!
Last week, many were hoping to see a drop in US CPI. The MoM figure was +0.4% vs +0.2% expected and +0.1% last. However, it wasn’t enough to pop the YoY CPI above last month’s 8.3% reading. The headline reading was 8.2% YoY. That’s the good news. The bad news is that the Core CPI, which excludes food and energy, rose to 6.6% YoY from 6.3% YoY in August. This was the highest Core reading in 40 years and suggests the bulk of inflation was due to sources outside of food and energy. In addition, the inflation components of the Michigan Consumer Sentiment Index were higher than Augusts. The 1-year Consumer Inflation Expectation for October increased to 5.1% from 4.7% last. In addition, the 5-Year Consumer Inflation Expectation for October increased to 2.9% from 2.7% in September.
This week, the most anticipated CPI reading will be from the UK, where the August reading was 9.9% YoY, which moved it a tick back under double digits. The September reading is expected to be 10% YoY, with the Core reading up ticking to 6.4% YoY. This will be an interesting reading for the Bank of England, which doesn’t meet again until November 3rd. The BOE has been BUYING Gilts in the markets to support the economy from collapsing. That ended on Friday. Recall that at the last meeting, the BOE said it would begin selling its assets. However, it was delayed until October 31st. With inflation near 10%, the BOE must hike rates. “By how much” is the question. Will the CPI reading be an impetus for the BOE to hike rates 75bps, even though it will have just ended a 2-week bond buying program?
Canada is expecting CPI to fall to 6.8% YoY from 7.0% YoY (could this result in a BOC pivot?). New Zealand reports CPI for Q3, which is expected to have fallen to 6.6% vs 7.3% last, while Japan is expecting a CPI reading of 3.2% YoY vs 3.0% YoY prior. Japan has already dismissed its inflation readings as transitory and will maintain an easing policy for the foreseeable future.
So just why was the Bank of England buying bonds in the first place? Recall that only 3 weeks ago new PM Truss and her new head of Treasury, Kwasi Kwarteng, announced a new tax cut and spending program. The goal was higher growth and economic stability. The results from the announcement were anything but stable. GBP/USD sold off to its lowest level EVER at 1.0357, while Gilt yields on the 30-year rose as high as 5.12%. Enter the BOE. In order to save an imploding market and several pension funds, the BOE stepped in and bought Gilts in the market, and said it would continue to do so until October 14th. As a result of the continued instability in the markets, UK Truss knew she had to something. She had already given up on the 45% tax cut for high income earners. But without the backing of the BOE, many felt the markets couldn’t survive. The result: The sacking of the Chancellor of the Exchequer, Kwasi Kwarteng, who helped Truss build the mini budget. In addition, Truss said that she would stick with (former PM) Johnson’s initial plan to raise the corporate tax rate from 19% to 25%. The U-turn with the tax plan has already cost Kwarteng his job. Many are wondering if Truss can survive as well. Why should people trust her? Does she have any credibility left? Could there be another election on the horizon? These are questions that traders will be looking for answers to as the week enfolds. In addition, watch the reopening of the fx and bond markets after the weekend. Traders will know quickly if the BOE needs to reenter the markets to save failing pension funds!
Earnings season is about to kick into high gear. As noted, banks began releasing earnings last week. JPM and WFC beat solidly. This week, markets will see Bank of America and Goldman Sachs. In addition, big tech begins reporting this week. These names include Netflix, Tesla, and IBM, among others. Other names reporting this week are as follows:
BAC, UAL, BK, BIIB, NFLX, GS, TSLA, IBM, JNJ, PG, INTC, SNAP, T, AAL, AXP, VZ, SLB
As mentioned above, the inflation train continues with week with CPI data due out from the UK, New Zealand, Canada, and Japan. In addition, China will release a plethora of data on Tuesday, while Australia will release its Employment Change for September on Thursday. Other important economic data to be released this week is as follows:
- China: 20th National Congress of the Chinese Communist PartyMonday
- New Zealand: Services NZ PSI (SEP)
- China: PBOC 1-Year MFL Announcement
- Japan: Industrial Production Final (AUG)
- US: NY Empire State Manufacturing Index (OCT)
- New Zealand CPI (Q3)
- Australia: RBA Meeting Minutes
- China: GDP Growth Rate (Q3)
- China: Industrial Production (SEP)
- China: Retail Sales (SEP)
- China: Fixed Asset Investment (YTD) (SEP)
- China: Unemployment Rate (SEP)
- Germany: ZEW Economic Sentiment Index (OCT)
- UK: 30-Year Treasury Gilt Auction
- Canada: Housing States (SEP)
- US: Industrial Production (SEP)
- US: Manufacturing Production (SEP)
- US: NAHB Housing Market Index (OCT)
- China: House Price Index (SEP)
- UK: Inflation data (SEP)
- EU: CPI Final (SEP)
- Canada: CPI (SEP)
- Canada: PPI (SEP)
- US: Housing Starts (SEP)
- US: Building Permits (SEP)
- US: Beige Book
- Crude Inventories
- Japan: Trade Balance (SEP)
- Australia: Employment Change (SEP)
- China: Loan Prime Rate 1Y
- China: Loan Prime Rate 5Y (OCT)
- Germany: PPI (SEP)
- US: Philadelphia Fed Manufacturing Index (OCT)
- US: Existing Home Sales (SEP)
- New Zealand: Trade Balance (SEP)
- UK: Gfk Consumer Confidence (OCT)
- Japan: CPI (SEP)
- UK: Retail Sales (SEP)
- Canada: Retail Sales (AUG)
- Canada: New Housing Price Index (SEP)
- Canada: Manufacturing Sales Prel (SEP)
- EU: Consumer Confidence Flash (OCT)
Chart of the Week: Daily Silver (XAG/USD)
Source: Tradingview, Stone X
Silver (XAG/USD) has been trading in a downward sloping channel since August 2020. On July 5th, 2022, the precious metal broke below the bottom trendline of the channel. Silver attempted to rebound a few times back into the channel, however it could only make it as far as the 38.2% Fibonacci retracement level from the March 8th highs to the September 1st lows, near 21.24. Since reaching that near-term high on October 4th, Silver has moved lower on 7 of the last 8 trading days. The 1 day it did close higher, it only closed higher by 0.01! If Silver continues to move lower, the firs t support is at the September 1st lows of 17.54. Below there, horizontal support crosses from the June 15th , 2020 lows at 16.95, then the April 2020 highs at 15.85. However, if Silver can manage to move higher, the first resistance is at the lows of October 5th at 20.02, then the highs of October 4th at 21.24. Above there, resistance crosses at the 200 Day Moving Average at 21.83.
More CPI data from the UK, New Zealand, Canada, and Japan could shake up the markets this week. And with the instability of the government in the UK, keep an eye out for the BOE as it ended its bond buying program on Friday. Could they enter again? And earnings season begins in earnest this week. Will tech companies show they have weathered the storm of rising interest rates? Also, as always, keep an eye on the BOJ. USD/JPY is trading 148.65 as we go to print, breaking its 1998 peak. Intervention is always a possibility when it comes to the BOJ.
Have a great weekend!