CPI Release Puts 100bps on the Table | Morning Express 07/13/22
Posted: July 13, 2022, 8:37 a.m.
E-mini S&P (September) / NQ (September)
S&P, yesterday’s close: Settled at 3823.75, down 33.00
NQ, yesterday’s close: Settled at 11,779.00, down 105.25
Fundamentals: Inflation is front and center this morning with U.S. CPI due at 7:30 am CT. The Core numbers typically have the greatest impact and exclude the more volatile food and energy. In today’s Wall Street Journal, there is an article detailing the Fed’s shift to paying closer attention to the headline data, including food and energy. Fed Chair Powell recently noted that, “headline inflation is what people experience.” Inflation expectations by consumers and businesses will be derived from this and we have noted previously the Fed believes expectations can become a self-fulfilling prophecy. With that said expectations for June headline CPI are +8.8% YoY, the highest since December 1981, and +1.1% MoM. The Core read is expected at +5.7% YoY, down from 6.0% in May, and +0.6% MoM. After today’s results, we can begin to assume inflation is coming down given the Bloomberg Commodity Index is roughly 20% from its June 13th peak and the Fed has aggressively tightened policy for six months. However, shelter is one of the stickiest components and accounts for one third of CPI. It is seeing a lag effect after not keeping pace with housing costs through 2021. All things considered, market participants are pessimistic given the trend in inflation and the market’s reaction to May’s data in June. This has certainly created selling and even systematic liquidation across risk-assets. Therefore, data that is not hot could bring relief of sorts.
Do not our daily Midday Market Minute, from yesterday.
Elsewhere, GDP, Manufacturing, and Industrial Production in the U.K crushed estimates. CPI from Germany and the Eurozone broadly was in line with expectations. Also, Eurozone Industrial Production crushed expectations. The Bank of Canada is expected to raise rates by 75 basis points at 9:00 am CT. Weekly EIA inventory data is due at 9:30 am CT. The U.S. Treasury will auction $19 billion in 30-year Bonds at noon CT, and the Fed releases their Beige Book at 1:00 pm CT.
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NQ (September)
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Crude Oil (August)
Yesterday’s close: Settled at 95.84, down 8.25
Fundamentals: Crude Oil fell precipitously again yesterday, similar to one week ago, but settling at the lowest level since April 11th. Given that recession fears and broad commodity liquidation are two of the major factors driving the weakness, today’s CPI data will have a key impact. Remember, the Federal Reserve is tightening policy to tamp down inflation, with the understanding that it has caused a recession. Covid cases in China and renewed restrictions are also driving prices lower, however, last night Shanghai reported no new cases outside of quarantine zones and this was seen as lifting the tape. In hindsight, another factor yesterday could have been whisper inventory numbers. After the bell, API reported a massive surprise build of 4.762 mb of Crude, +2.927 mb Gasoline, and +3.262 mb Distillates, while levels at the Cushing hub rose by 298,000. This was a composite build of 10.951 mb and completely different from what’s expected on today’s EIA report. However, it certainly sets a bar. This is when we remind you the White House has released another 27 mb of Crude from SPR over the last month, bringing levels to the lowest since 1986. Expectations for today’s official report are night and day from API at -0.154 mb Crude, -0.357 mb Gasoline, and +1.591 mb Distillates.
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Gold (August) / Silver (September)
Gold, yesterday’s close: Settled at 1724.8, down 6.9
Silver, yesterday’s close:Settled at 18.958, down 0.174
Fundamentals: Gold and Silver are lower after today’s hot CPI. Headline inflation came in at 9.1% YoY and 1.3% MoM. Core CPI was 5.9% YoY and +0.7% MoM. This quickly spiked the U.S. Dollar and yields from session lows. The odds of a whole 1% hike (100 basis points) by the Federal Reserve later this month rose to 40%. It will be interested to see if this knee jerk reaction in Fed Funds futures sticks. The odds of a 75 basis point hike are now about 60% and a 50 basis point hike has been completely priced out. When May’s CPI came in hot in June, Gold did trade lower before rallying after the equity open. We do believe today’s hot inflation read foreseeably brings a near-term ceiling to inflation given the sharp drop in commodities and this could be seen as a positive. However, the cost of shelter remains a big question.
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Silver (September)
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