High CPI print will keep Fed hawkish

• US CPI inflation surprise to the upside in September as it came in at 8.2% y/y, down from 8.3% in August but still higher than the projected 8.1%. Of more concern for the Fed will be the fact that core inflation accelerated by more than had been anticipated, rising from 6.3% in August to a 40-year high of 6.6%. This was also the second month in a row that core inflation accelerated. Core inflation was 0.6% m/m and headline 0.4%. The print makes a fourth 75bps hike in November all but certain and a greater 100bps hike is now being priced in as inflation is clearly still not under control, which as the FOMC minutes from the September meeting released the previous day made clear, remains the key priority. While food and energy have come down to 1.4pp and 1.6pp of the total respectively, the contribution of services has steadily risen to 3.9pp in September, implying increasingly sticky price growth that has gone far beyond the commodity crunch. Costs for shelter, around a third of total CPI, were up 6.6% y/y.
• Chinese September CPI inflation meanwhile came in below expectations in data released this morning, at 2.8% y/y (consensus had pencilled in a 2.9% gain). This was up from the 2.5% recorded in August and marked the fastest level of price growth since April 2020 but core inflation slowed to just 0.6%, the lowest level since March 2021. Price pressures in the pipeline are also fairly subdued, as factory gate inflation fell to just 0.9% in September from 2.3% in August. In contrast to much of the world, analysts are warning that China is facing a deflationary challenge given subdued activity levels there.
• There remain high levels of uncertainty around government and central bank policy in the UK, with Chancellor of the Exchequer Kwasi Kwarteng departing the US IMF meetings early yesterday as rumours of imminent u-turns on controversial tax policies abounded. Concessions by the government on the controversial mini budget which stoked recent market chaos appear to be on the cards, including the planned scrapping of the hike in corporation tax. Provided there is not another swing in policy plans, the subsequent rebound in UK assets seen yesterday will presumably allow the Bank of England to end its emergency bond buying today as planned.
• Iraq’s parliament has elected a new president, Abdul Latif Rasheed, a year after the country’s elections. He subsequently appointed Mohammed Shia al-Sudani as prime minister, who now has 30 days to form a government. The news is positive for Iraq’s economy as despite enjoying significant oil sector growth this year, the lack of government and policy formation has stymied spending and investment.

 Today’s Economic Data and Events

• US retail sales, % m/m, September. Forecast: 0.2%
• 18:00 US University of Michigan sentiment index, October. Forecast: 58.8

Fixed Income

• US Treasuries tanked on the release of the September US CPI report which showed core price pressures actually worsening rather than showing a material response to tighter monetary policy. Yields on the 2yr UST jumped nearly 30bps from bottom to top, eventually settling the day up 17bps higher at 4.4635%. In the 10yr, yields popped almost 20bps to more than 4.05% before fading the move later in the day and settling up about 5bps at 3.9435%.
• Markets have now completely priced in a 100bps move at the November FOMC meeting with another 75bps tentatively priced in for December as well. The peak in the Fed funds is now pitched at almost 4.9% according to futures markets.
• Markets are preparing for a change in UK policy in the coming days with some of the substantial tax cuts announced by the chancellor last month set to be unwound. Yields on the 10yr gilt dropped more than 23bps to 4.186% while today marks the end of the Bank of England’s emergency intervention to support markets.
• European bond markets were generally stronger overnight with 10yr bund yields down almost 3bps at 2.276% and the 10yr French bond falling 4bps to 2.869%.

FX

• A potential change in UK government policy sparked a rally in British assets, including the pound. Sterling jumped more than 2% overnight to 1.1326 on news that chancellor Kwasi Kwarteng was returning to the UK early from the IMF meetings in the US. EURUSD also bounced strongly, up 0.75% to 0.9776 as markets eye a potential opening for diplomacy on the war in Ukraine. USDJPY added another 0.14%, however, closing above the 147 handle.
• Commodity currencies all closed stronger against the dollar with USDCAD down 0.46% to 1.3753 and AUDUSD adding 0.3% to 0.6298 and NZDUSD up 0.5% at 0.5638.

Equities

• There were sharp swings in US equity markets yesterday which to some degree defied gravity given the high CPI reading all but ensures more hawkishness from the Fed. While initially trading down, by the close of session all three benchmark indices closed with sizeable gains, as the NASDAQ, the S&P 500, and the Dow Jones added 2.2%, 2.6% and 2.8% respectively.
• Locally, the DFM closed up 0.7% while the ADX dropped -0.4% and the Tadawul lost -1.1% on the day.

Commodities

• Oil prices closed stronger overnight with Brent rallying 2.3% to USD 94.57/b and WTI adding 2% to USD 89.11/b. The IEA cautioned that the OPEC+ cuts would increase “energy security risks worldwide” and reduce the ability of markets to rebuild inventories in H1 2023. The agency also cut its demand growth forecast to 1.7m b/d from more than 2m b/d previously as the economic backdrop worsens.
• US commercial crude stocks rose by 9.9m bbl last week along with a decent build in gasoline inventories of 2m bbl. Production fell by 100k b/d to 11.9m b/d.

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