Inflation Keeps Central Banks Aggressive | Morning Express 08/17/2022
Posted: Aug. 17, 2022, 8:49 a.m.
E-mini S&P (September) / NQ (September)
S&P, yesterday’s close: Settled at 4307.75, up 9.50
NQ, yesterday’s close: Settled at 13,658.25, down 23.00
Fundamentals: U.S. equity benchmarks are on their back foot this morning. Selling pressure arose yesterday as the S&P pinged the 200-day moving average for the first time since April 21st. There was a similar whippy tape last Thursday when the Russell 2000 reached for its 200-day for the first time since January 5th. Although the indices broadly held it together, they finished with a sense of softness and off their best levels of the session, setting the stage for today’s earnings, Retail Sales data, and FOMC Minutes. But first, inflation data from the U.K. came in hotter than expected, sparking renewed selling pressure. July CPI came in at 10.1% versus 9.8%, the highest since 1982. Probabilities for the Bank of England have become unanchored, encouraging added volatility. They are now expected to hike by 125 basis points through yearend, compared to roughly 50 basis points prior to the inflation read. Furthermore, the U.K. yield curve of 2’s versus 10’s inverted decisively on the news for the first time since 2008. With today’s FOMC Minutes in mind, other than a marginal back and forth on whether the Fed will hike by 50 or 75 basis points in September, well-anchored expectations have helped stoke this historic rally in equity markets. The odds now favor a 75 basis point hike with a 54.5% probability, but through today’s releases we will be more closely watching those expectations through yearend, where the odds of an added 25 basis points (totaling 150 bps through yearend) is emerging with a 27.3% probability.
Retail Sales was mixed, with headline MoM coming in flat, versus +0.1% expected. However, the Core set, excluding gas and autos, was much strong than anticipated at +0.4% versus -0.1%. The Control read also topped estimates at +0.8% versus +0.6%, and factors into PCE to provide a smoothing effect.
Do not miss our daily Midday Market Minute, from yesterday.
On the earnings front, Target is down 2% after missing both top- and bottom-line estimates due to shedding unwanted inventory. Lowe’s is up more than 1% after a beat on EPS, but missed revenue estimates due to a shortened spring and less DIY spending, however, double digit Pro growth for the ninth consecutive quarter helped boost sentiment. We look to Cisco and Synopsys after the bell.
Elsewhere, China announced it will join in military exercises in Russia, along with India, Belarus, Mongolia, and others.
U.K. yield curve, 2's versus 10's, inverts decisively for the first time since 2008. Soaring inflation and a more aggressive BoE is now rippling a similar effect experienced in the U.S. yield curve.
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NQ (September)
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Crude Oil (September)
Yesterday’s close: Settled at 86.53, down 2.88
Fundamentals: Crude Oil slipped sharply again yesterday and is holding at five-month lows ahead of today’s inventory data. A sour start to the week began with the slate of Chinese economic data Sunday night but rising expectations for an Iran Nuclear Deal have weighed further on the tape. OPEC’s new Secretary General said he does not expect a global recession and sees continued solid demand from China despite their zero-virus policy. Additionally, in the wake of the Iran developments, Goldman Sachs reiterated their bullish view, citing they do not anticipate a significant rise in exports this year. In our opinion, Iran is already exporting a significant amount on the black market, stealing share from what is accounted for and therefore we do not see much impact other than in a headline manner.
Inventory data is front and center this morning. Expectations are for -0.275 mb Crude, -1.096 mb Gasoline, and +0.44 mb Distillates. Last night’s API was largely in line. Traders want to keep an eye on SPR, Net-Imports, the potential pull-forward on Gas demand and Refinery Utilization.
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Gold (December) / Silver (September)
Gold, yesterday’s close: Settled at 1789.7, down 8.4
Silver, yesterday’s close: Settled at 20.085, down -0.187
Fundamentals: Gold and Silver are on their back foot again this morning. Much of the pressure is coming from U.S. Dollar safe haven strength and higher global yields, on the heels of the U.K.’s hot inflation data. The USDCNH finds itself at a technical inflection point, and we believe it would be extremely difficult for Gold to rally significantly without the U.S. Dollar weakening against the CNH. Today’s Retail Sales data was mixed and highlighted in the S&P/NQ section. However, some of the overnight selling pressures have abated after the release. We now await today’s FOMC Minutes at 1:00 pm CT, which beg to bring volatility to the precious metals space.
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Silver (September)
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