It’s been a mixed performance for US shares last night and European ones this morning ahead of key factors that will really test how ready we are for risk.
The European Central Bank will announce its interest rate decision later today and oh my it’s a close one to call. We’ve also had news on the Arm IPO, which will test traders' appetite for growth stocks, and an inflation reading from the US. The FTSE 100 is up 0.3 per cent mainly due to a rising oil price pushing up energy stocks. However, shares in Frankfurt and Paris are a shade weaker. The euro is steady around the $1.07 mark, as investors wait to see whether the ECB follows through with another hike.
Treasury yields lower with the 10-year yield moving to 4.24 per cent after yesterday’s inflation print from the US with the dollar trimming gains from yesterday’s session, but gold is lower with real rates moving up this morning. Wall Street was mixed with the Dow Jones slipping 0.2 per cent and the Nasdaq making back some ground to rise 0.3 per cent. The S&P 500 split the difference with a 0.12 per cent rise in the session.
The ECB: it is a coin toss as to whether the central bank opts for another hike. I think it goes for a final 25bps move and lets the dust settle, but no one knows. A Bloomberg survey had 66 economists split 34 to 32 on hold versus rise. But I think the ECB will use updated forecasts on inflation for next year as the cover to keep rising despite a worsening economic backdrop. There is a good case to be made for both a pause and a hike today – similar to the Bank of England, it’s in a stagflation situation with little room to manoeuvre.
US inflation: Yields initially spiked but the 10-year is now down quite a bit and the 2-year back to 4.97 per cent. The CPI showed 0.3 per cent month-on-month, a tad hotter than expected and the Federal Reserved would have preferred another 0.2 per cent reading. The Fed might still be more minded to keep a rate hike on the table for this year even though I still think it will stand pat next week.
The super core was still rather hot – core services ex-shelter at 0.5 per cent month-on-month, up from +0.2 per cent in July. Year-over-year, core came down to 4.3 per cent as expected from 4.7 per cent which ought to be positive for the Fed. Gasoline contributed more than 50 per cent to the gain in the headline CPI, which rose 0.6 per cent month-on-month in line with expectations for annual read to accelerate to 3.7 per cent year-on-year from 3.2 per cent in the prior month, ahead of the 3.6 per cent expected.
Now, the main question for the Fed meeting is the dot plot. With the latest round of economic projections due, we will see whether policymakers still see one more hike this year. If the dots are the same as June, markets could move to price in a higher likelihood the Fed hikes in November and push back on when the Fed starts to cut. If the median dot is lower than the 5.6 per cent forecast in June, then it could be the signal to the market that the Fed is done.
Oil has pulled back a bit from yesterday’s 10-month high after a surprise build in US inventories. Looks like a consolidation, but the bulls are still in charge.
The Trader is written by Neil Wilson, chief market analyst at Finalto
