US Inflation & Chinese Politics | Morning Express 10/17/2022

Posted: Oct. 17, 2022, 9:17 a.m.

Stocks, commodities, and Treasuries are battling back from Friday’s beatdown. A melt higher early Friday, on the heels of Thursday’s historic reversal, began pulling back due to a barrage of Fed speak. However, it was rising inflation expectations on October’s first look at the Michigan Consumer survey that brought the hammer; 1-year expectations rose to 5.1% from 4.7% a month earlier and 5-year expectations to 2.9% from 2.7%. This was released as Kansas City Fed President George said, “I'M KEEPING AN EYE ON WHETHER PERSISTENTLY HIGH INFLATION CREEPS INTO EXPECTATIONS, IF IT DOES, TRADE OFFS BECOME MORE COSTLY.” We have noted the Fed’s rhetoric before that inflation expectations can become a self-fulfilling prophecy. Of course, this data, coupled with hawkish Fed speak amid such a fickle market environment, led to a broad-based bludgeoning.
However, over the weekend, the Fed’s George warned of raising interest rates too fast. Historically, she has been more of a moderate dove, and this certainly showed in a counter to her comments Friday.
On Friday, the U.S. 10-year yield rose from 3.85% to 4.02%. The psychological 4.0% mark is becoming a bit sticky as yields retreat and prices firm to start the week.
Geopolitics are at the forefront, driving market sentiment, certainties, and the lack thereof.
K. Chancellor Kwarteng, the driver of such a dramatic and out-of-touch policy that created chaos, was dismissed on Friday. In simple, he was attempting to offset an inflation-driven recession, one the Bank of England was stoking, with tax cuts to the top and bottom earners. It really made absolutely zero sense, and markets punished the idea.
New Treasury Chief Jeremy Hunt has lifted sentiment by reversing almost all of the U.K.’s proposed tax cuts, helping to reestablish stability.
10-year U.K. Gilt yields have slipped dramatically on the day to 3.94%, down from a rebound to 4.37% on Friday.
China opened its Communist Party conference yesterday. President Xi’s speech focused on not backing down from zero-virus policy, acknowledging slower growth because of it, an uphill battle to growth, pressure on Taiwan, and expansion globally. President Xi set to earn another term in office.
China postpones a data slate that includes GDP, probably to avoid embarrassing Xi amid the conference.
In a report this morning, China’s Xi encouraged all Chinese citizens to leave Ukraine and the surrounding areas immediately. This is an odd request, especially after the comments from President Putin on Friday. Traders must keep an ear to the ground for further geopolitical developments.
NY Empire State Manufacturing missed at -9.1% versus -4.00% expected. Bad news could play as good news for markets, but Priced Paid rose 9.0 from 39.6 to 48.6, meaning a higher percentage of respondents reported higher costs.
Bank of America is +4.5% after beating top and bottom estimates. JNH, GS, and NFLX report tomorrow.