Michael Brown
DIGEST – Crude benchmarks gained on Thursday, while stocks advanced too, as participants now look ahead to today’s US CPI figures, though a Fed cut next week remains locked-in.
WHERE WE STAND – Short & sweet this morning, as the week finally draws to a close.
Crude benchmarks were the big mover yesterday, with both Brent & WTI barrelling higher, adding a slick 5% apiece. The catalyst here being the US’ announcement of sanctions on Russia’s largest oil refiners, leading to worries over potential supply interruptions. While I’m always tempted to fade any geopolitically-induced market moves, it increasingly looks as if crude has put in a bottom, especially with the US sitting on the bid as the SPR is refilled.
If that is indeed the case then there will naturally be inflationary repercussions to follow, even if policymakers will likely look-through such factors and shrug them off as ‘temporary’. Markets, clearly, aren’t ready to do the same, as Treasuries softened and breakevens rose across the curve yesterday. My bias remains towards shorts at the long-end of the curve, though it’s tough to have much conviction behind that unless and until we get a convincing break north of 4% in the benchmark 10-year.
As for trade elsewhere, it was all a bit turgid once more, with no especially obvious theme making itself known, though ultimately a risk-on bias was in evidence. I’d wager that a large degree of these lacklustre conditions stemmed from participants seeking to square up their books, as well as a broad lack of conviction, ahead of not only today’s CPI print, or the weekend trade talks, but also next week’s bonanza of central bank decisions and Mag 7 earnings.
Still, spoos remain inches away from a record high, and I remain a bull, not only as momentum continues to favour further upside, but also amid a solid fundamental bull case too as the policy backdrop loosens, while both earnings and economic growth remain robust.
Speaking of record highs, we had one in the FTSE 100 yesterday, though that’s quite clearly not a reflection of some sort of homegrown economic optimism. Quite the opposite, actually, if yesterday’s CBI survey is anything to go by! Instead, the FTSE’s charge is being led, for the time being, by commodity names, with the weaker pound providing a helping hand too.
That sterling softness seems unlikely to end particularly soon, as the fiscal ‘doom loop’ deepens by the day, and as markets continue to reprice BoE policy expectations in a dovish direction after the cooler than expected September CPI report. Still, the G10 FX space has become a bit like watching paint dry in recent weeks, and that doesn’t seem likely to change any time soon. I do like the buck higher, though, partly by default amid the numerous woes elsewhere, but also as the Fed ease into a resilient underlying economy and tilt risks to the outlook increasingly to the upside.
LOOK AHEAD – Finally, we get some US data today!
September’s CPI figures are due this lunchtime, with both headline and core prices seen having risen by 3.1% YoY last month, amid the continued pass-through of tariff-induced price pressures. Frankly, though, whatever the print looks like, it won’t deter the FOMC from delivering a 25bp cut next week, or at the December meeting, even if there will probably be some knee jerk vol as the data crosses.
Besides that, today’s all about PMIs, with ‘flash’ October figures due from pretty much every major economy, though all of the figures likely to show very little change from how conditions were last month.
Lastly, before we start to think of a pre-weekend beverage or three, it’s worth flagging the elevated potential for gapping risk at Monday’s open, not least as Treasury Sec. Bessent and China’s He Lifeng conduct another round of trade talks in Malaysia.
Brown is a Senior Research Strategist at Pepperstone
