As markets await CPI
Some folks have begun to ask why
The Fed needs to keep
Inversion so deep
Since ‘flation is no longer high

Instead, what these folks want to see
Is rates heading back down to three
But Jay’s been quite clear
Throughout this whole year
That higher for longer is key

It has been an extremely quiet evening session with very little in the way of new information for market participants as all eyes are on tomorrow morning’s CPI print in the US.  There were only two pieces of mildly noteworthy data, UK Unemployment rose one tick to 4.3%, as expected and the overall employment report was largely in line with expectations.  As well, the German ZEW Survey showed that while the current situation has actually deteriorated, falling to Covid-like levels, Expectations were marginally less awful than forecast.  But in the end, it is hard to make the case that either of these releases had much of an impact on the market.

On the geopolitical front, much is being made of North Korean leader Kim Jung-Un’s trip to Moscow to meet with President Putin, and ostensibly promise to sell him weapons and ammunition.  But again, this doesn’t appear to have any market impact.  Arguably, of much more importance to the market are two US tech firm stories; first Oracle giving disappointing guidance in their earnings last night indicating that perhaps AI is not actually going to rain money into every tech firm right away, and, second the anticipation of Apple’s release of the iPhone 15 today, as analysts try to determine if that company can continue to deserve its current valuation.  At this hour (7:30), Oracle stock is much lower, about -10%, and the entire US equity futures market is marginally under water as well, but just -0.2% or so.

If I had to characterize today’s market it would be stagnant with a flavor of risk-off.  Given the perceived importance of tomorrow’s data release, and the fact that its timing was well-known in advance, it appears that positions have already been established based on individual views.  The result has been lower volumes and less movement ahead of the release.  As well, absent any Fed speakers it is hard to come up with a reason to adjust any views at this point in time.  So, my sense is we are set for quite a dull session overall.

Perhaps this is a good time to recap the current narrative, at least as I see it.  I believe a majority of market participants believe the Fed is done hiking rates and it is only a matter of time before they start cutting them.  There is a strong belief that the Fed will achieve the much-vaunted soft landing despite the long odds of success on that front and a history that shows they have only ever been able to do so once.  The odd thing about this soft-landing belief is the idea that if the Fed is successful in achieving that outcome with interest rates at 5%, that they would suddenly cut rates afterwards.  I need someone to explain to me why the Fed would change the policy that achieved their goals.  A correlating narrative remains that AI is not merely the future, but the present and that tech stocks can grow to the sky.  And maybe they can, but I would bet the under there.  

And lastly, there is a conundrum in this narrative as the de-dollarization story continues to get a great deal of play.  However, if the Fed is successful and AI really is going to drive tech stocks higher forever, why would the dollar lose its luster?  It seems to me, especially given the fact that Europe and probably China are heading into recession, that the dollar will be in huge demand.  At any rate, my take is those are the underlying theses driving markets right now.

So, a tour of markets overnight shows that bond markets are essentially unchanged, stock markets were mixed in Asia, with Chinese shares under pressure but Japanese and Australian shares ok while European shares are under some pressure, and the dollar is rebounding a bit from yesterday’s sell-off.  Arguably, yesterday’s dollar move was a result of the news from Japan and China, both of whom were unhappy over their respective currency’s weakness, but that is, literally, yesterday’s news.  One last thing shows oil (+0.8%) rallying again with WTI above $88/bbl this morning, a new high for this move, which continues to support all energy prices.  In fact, it is this story, a continued lack of supply in the oil market relative to demand that, regardless of the much-hyped transition to renewables, continues to grow, is going to support the price for a long time to come.  And that is going to continue to pressure prices higher as energy is an input into everything we do, both manufacturing and services.

And that’s really it for today, a very quiet session ahead of the next big data drop tomorrow morning.  Before I end, though, I think it is important to understand the nature of economic forecasting and there is a perfect example right now.  I have frequently mentioned the Atlanta Fed’s GDPNow forecast as a potential harbinger of things to come.  Certainly, the market sees it that way.  Well, other regional Fed banks wanted to have their own versions of that GDP Nowcast and this is what we are currently seeing:

• Atlanta Fed:     5.7%
• NY Fed:            2.3%
• St Louis Fed:    -0.3%

To me, that is a perfect picture of the current situation, proof that nobody has any idea what is going on in the economy.

Good luck

Adf