Stagflation Risks With Yields at Cycle Highs | Morning Express 10/12/2022
Posted: Oct. 12, 2022, 8:42 a.m.
E-mini S&P (December) / NQ (December)
S&P, yesterday’s close: Settled at 3599.25, down 26.00
NQ, yesterday’s close: Settled at 10,845.00, down 139.50
Fundamentals: U.S. equity benchmarks firmed up in the first half of yesterday’s session, but a failure at technical resistance sent the S&P and NQ spiraling to a fresh bear market low. The reversal was the latest example of how fickle the landscape is. Although we find the severity of the selling more technically motivated given the environment, it can be attributed to Bank of England Governor Baily telling (reminding) pension funds they have three days before the bank ends its emergency support. His comments should not have been a surprise, but there is certainly an undertone the BoE is willing to extend support. In fact, the Financial Times cited an anonymous source saying just that. The report staved off added selling in equity markets overnight and lifted the Cable from a two-week low, but U.K.’s Gilts are still on the mend, with the 30-year regaining 5.0%. To make matters worse, yields in the U.K. are rising despite an awful slate of economic data that included much worse than expected GDP, Manufacturing, and Industrial Production.
It is not only yields in the U.K. as the U.S. 10-year Note has risen by 30-bps in one week, ahead of today’s auction and that from German set a new cycle high today.
U.S. inflation data also makes itself to the forefront, beginning with PPI. Remember, producer prices are a leading indicator for consumer prices. September headline PPI month-over-month is expected to rebound from disinflation in August (-0.1%) to +0.2%, however, the year-over-year read is seen leveling off a bit from 8.7% to 8.4%, though still at 40-year highs. The set, excluding food and energy, is expected to increase +0.3% MoM, down from +0.4% in August and steady at 7.3% YoY. A hotter read on inflation will almost certainly put the risk-appetite on its back foot. But for what it’s worth, we ask, has negativity, at this point in time and from this level, become too excessive?
Do not miss our daily Midday Market Minute, from yesterday.
Breaking News: Headline PPI came in hotter than expected at +0.4% MoM, but August disinflated more than thought at -0.2%, and 8.5% YoY. Core PPI MoM was in line and YoY was soft at 7.2% vs 7.3%. Risk-assets took a sharp kneejerk lower immediately.
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NQ (December)
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Crude Oil (November)
Yesterday’s close: Settled at 89.35, down 1.78
Fundamentals: OPEC’s Monthly Report is in focus this morning. The cartel cut its full-year 2022 world oil demand outlook, once again, to 2.64 mbpd from 3.1 mbpd and its 2023 outlook to 2.34 mbpd from 2.7 mbpd. They cited the continued resurgence of the virus in China and slowing economic growth, as they also cut their 2022 global economic growth outlook to 2.7% from 3.1% and 2023 to 2.5% and noted downside risks still exist. Additionally, although OPEC+ produced less than their ceiling, output increased by 146,000 bpd to 29.77 mbpd, led by Saudi Arabia and Nigeria.
The EIA will release its Short-Term Energy Outlook at 11:00 am CT.
Due to the Columbus Day holiday, inventory data from API’s private survey will be released later today, and the weekly EIA inventory report will be out tomorrow.
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Gold (December) / Silver (December)
Gold, yesterday’s close: Settled at 1686, up 10.8
Silver, yesterday’s close: Settled at 19.487, up 0.128
Fundamentals: Gold and Silver slipped sharply from a buoyant start to yesterday’s intraday session as risk-assets broadly rolled over. The S&P hit a strong area of resistance, and the U.S. Dollar was quickly revived from session lows after Bank of England Governor Bailey told (reminded) pension funds they have three days before the bank ends its emergency support. Additionally, the U.S. 10-year Note is holding against 4.0%, a rise of 30bps in one week, ahead of today’s auction. However, it is not only yields in the U.S. as those from Germany, and the U.K. are poking at cycle highs, all of which have weighed on the metals camp. Today’s headline PPI was hotter than expected, and this could make it a shaky landscape from commodities priced in U.S. Dollars today.
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Silver (December)
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