Michael Brown Senior Research Strategist at Pepperstone
DIGEST – Cooler than expected US inflation data saw stocks end last week at record highs, even if trade was choppy elsewhere. A monster week now awaits, with US-China trade talks, four G10 policy decisions, and megacap earnings all in the mix.
WHERE WE STAND – Cooler than expected US CPI, and fresh record highs on Wall St; honestly, what more could one want on a Friday?!
Headline prices rose a cooler than expected 3.0% YoY in September, with core inflation rising by the same magnitude, with softer MoM prints to boot, at 0.3% & 0.2% respectively. Digging into the data, core goods prices held steady at 1.5% YoY, potentially pointing to the peak of tariff-induced price pressures being in the rear view mirror, while core services prices rose 3.5% YoY, a cycle low, and a further sign that the risk of inflation persistence continues to subside.
All that, though, doesn’t really change anything for the FOMC. 25bp cuts in October and December were a certainty before the CPI report, and remain a certainty after it, as price pressures appear to cool, even though the Committee’s reaction function continues to hinge largely, if not entirely, on the employment side of the dual mandate, as policymakers seek to move to a less restrictive stance in order to prop up a stalling US labour market.
Anyway, even if the data doesn’t really move the needle for the Fed, it did see stocks on Wall Street end the week at record highs – the S&P’s 33rd ATH of the year.
Even if we didn’t really learn anything new from the data, it does at least reinforce the ‘goldilocks-esque’ bull case of a resilient underlying economy, robust earnings growth, and a looser monetary policy backdrop. Chuck on top of that the soon to reopen corporate buyback window, as well as the classic FOMO/FOMU flows into year-end, and I’m even more convinced of my 7,000 spoos target being hit before 2025 is done & dusted. A fresh bout of optimism on the Sino-US trade front certainly isn’t doing things any harm on this front either, with the threat of 100% tariffs on China looking increasingly like yet another ‘TACO’ moment.
It wasn’t just the US CPI figures that beat expectations on Friday, but the latest UK retail sales stats too, with headline sales having risen by 0.5% MoM in September, well above the top end of the forecast range. Last week actually wasn’t a bad one for UK Plc, with September’s ‘flash’ PMIs topping expectations as well, plus consumer confidence coming in better than expected, and a whole host of banks reporting solid earnings too.
Just a shame, really, that Chancellor Reeves keeps flying the ‘trial balloon’ of an income tax hike at the end-November Budget, which will kill any consumer momentum stone dead. That probably explains why cable ended the week south of the 1.33 figure – a dip I have no desire at all to be buying – but that move also helped lift the FTSE 100 to a record high, above 9,600 for the first time.
Elsewhere, Friday ultimately proved to be a rather choppy day for the most part, as the initial dovish reaction in FX, FI & gold to the aforementioned CPI data fizzled out an hour or so after the print, resulting in a rather dull grind into the weekend.
Still, I remain bullish on the buck, with that data giving no reason at all for the Fed’s ‘run it hot’ approach to shift any time soon, though am becoming increasingly impatient in waiting for the FX market to actually wake up. Even with this week’s monster slate of event risk (see below), one-week implied vols across the G10 space almost all trade below the 10th percentile of the 12-month range. Only the JPY is an exception here, probably a reflection of last week’s spot weakness as the ‘Takaichi Trade’ staged a comeback.
LOOK AHEAD – As mentioned, it is indeed a monster week ahead, as even a quick glance at the calendar shows.
Trade developments are likely to dominate through the week, as President Trump embarks on a tour of Asia, though we’ll have to wait until Thursday for the pivotal meeting with China’s President Xi, as the threat of an additional 100% tariff on Chinese goods from 1st Nov continues to loom large. The assumption, of course, remains that that is just a negotiating gambit, with this week’s talks leading to a restoration of the ‘status quo’ and a truce between the two nations. Certainly, that’s what the weekend US-China talks in Malaysia would lead us to believe.
Meanwhile, it’s a jam-packed week of G10 policy decisions. The FOMC will deliver a 25bp cut on Wednesday evening, and likely hint more strongly at an end to balance sheet run-off by year-end, with there being a modest chance that QT could even be brought to an end this week. Elsewhere, the BoC will also deliver a 25bp cut on Wednesday, while both the BoJ and ECB are set to stand pat on Thursday, with the latter reiterating a ‘data-dependent’ and ‘meeting-by-meeting’ approach.
The data docket is also a busy one, although US releases remain affected by the ongoing government shutdown, so Q3 GDP and PCE are almost certainly off the cards. Participants will, though, pay close attention to the latest GDP and CPI prints out of the eurozone, with US consumer confidence and Japan’s Tokyo CPI metrics also worth watching.
Lastly, the busiest week of Q3 earnings season on Wall Street lies ahead as well, with about 40% of the S&P 500 by market cap set to release figures. Naturally, most focus will fall on the five ‘Magnificent Seven’ names releasing earnings – Meta (META), Microsoft (MSFT) and Alphabet (GOOG/L) on Wednesday; followed by Amazon (AMZN) and Apple (AAPL) on Thursday.
As always, the full week ahead calendar is below:
