US yields and the Dollar jump on hotter-than-expected CPI

US inflation data wasn’t very soothing for investors at yesterday’s release. The headline inflation remained steady at 3.7%, while initial jobless claims came in soft, after last Friday’s shocker NFP showed 336K new nonfarm job additions. The data softened the Federal Reserve (Fed) doves’ hand. The US 2-year yield jumped past the 5% level, while the 10-year yield returned above the 4.70% mark and the 30-year jumped 18 bp to above 4.80% after a $20 billion auction saw weak demand.  

Of course, the stickiness in yesterday’s inflation data wasn’t a surprise. The rising food and energy prices were partly responsible for the latest surge, while shelter was again one big headache. The 3-month inflation sailed away from 2.4% to 3.1%. Core inflation remained steady, however, but supercore inflation – which excludes housing and good prices - spiked higher. As such, even though we think that the housing costs will come down and the positive pressure in energy started easing, the latest numbers were not convincing. Yet, the latest set of jobs and inflation data will unlikely change the Fed’s mind for the November meeting. The Fed is expected to sit on its hands, wait and see. But the first Fed rate cut won’t come so soon, and the Fed will try to capitalize on the ‘higher for longer’ policy to avoid having an accident on what they call ‘the last mile’. The Fed is expected to cut rates in July next year. The expectation was for June before yesterday’s CPI data. Activity on Fed funds futures still gives more than 90% chance for a no action in November, and around 70% chance for a no action in December.   

The market reaction to yesterday’s data was very clear. The rebound in yields sent the US dollar rallying, and equities tumbling. The S&P500 retreated yesterday on the back of discouraging inflation data, and on news that nearly 9K more people at Ford joined the UAW strike, while GM, Ford and Stellantis laid off near 5K workers in response to the past weeks’ chaos – and it will certainly show in next set of jobs data. But now, stock traders’ attention will shift to earnings from today, as the US big banks will kick off the earnings season in a few hours.  

The Dollar surfs on inflation wave 

The US dollar index rallied back into its July to now ascending channel, the EURUSD sank below 1.06, after testing the July to October downtrending channel top. The minutes from the latest European Central Bank (ECB) meeting confirmed that the latest ECB rate hike was a close call. The latter further boosted the ECB doves, while the latest US inflation data held back the Fed doves from making further progress. If the Fed doves don’t take back control rapidly, we will likely see the EURUSD melt down toward 1.0410, to meet the 50% Fibonacci retracement on last year’s rally there. The dollar-yen remains cautiously bid near the 150 level, while Cable – which could’ve rallied above both a short-term and a long-term bearish trend channel, simply couldn’t take the chance after yesterday’s data showed a meagre GDP growth of 0.2% in August due to a weaker-than-expected recovery in industrial and manufacturing production. The good news is that inflation sinks fast in the UK as spending slows. The truflation for the UK has taken a dive below the 8% level. It’s still far from the Bank of England’s (BoE) 2% target, but at this speed, Rishi Sunak will get his inflation halved by the year end.  

In energy, the selloff in crude oil extended to below $82pb as the EIA revealed a more than 10-mio barrel build in US crude inventories last week, but buyers gently return into the $80pb psychological level, which is – we know – the Saudi’s limit for eventually taking more action to restrict demand.  

The Middle East continues to boil, and the tensions are expected to escalate further and threaten supply. The good news is, the EIA expects the growth in oil demand to slump by more than 50% next year, and the slowing demand growth should boost inventories to the positive territory, again, even though the world fuel consumption is still expected to hit a fresh record this year, driven by China.  

But China should wake up first. The latest inflation numbers from China don’t sound like the Chinese will move the oil market anytime soon. The Chinese consumer prices remained flat in September, producer prices fell more than expected and imports came in weaker than expected. The only thing that’s exciting about China is the expectation that the government will throw more money on to the Chinese problems, and that could, maybe, inflate asset prices.