After being in hibernation since the US November payrolls and services ISM reports, the peak inflation narrative got another lift this afternoon when US CPI rose by its lowest annual number this year, sending European markets sharply higher, and the Stoxx 600 and DAX to their highest levels in 6 months, although we are pulling off those peaks heading into the close.
Europe
A number of 7.1% was below expectations of 7.3% and offered a boost to those who think that the Federal Reserve may not have to go as hard, or as far on rate hikes as we head into 2023.
Whether or not that particular narrative survives first contact with Fed chair Jay Powell tomorrow, and the post meeting press conference remains to be seen, but it’s now getting to the point that Fed officials can no longer dismiss the direction of travel for headline CPI as one particular data point. A trend appears to be forming as far as inflation is concerned, with the only question now being whether we will start to see that same trend start to play out here in the UK and Europe.
Today’s gains have been wide ranging with online retail companies helping to lead the gains, with Ocado rising to 4-week highs, and Zalando in Germany rising to 6-month highs.
Rolls-Royce shares are lower after being placed on negative catalyst watch by JP Morgan, ahead of the start of new CEO Tufan Erginbilgic, at the start of next year, when he is expected to outline a weaker than expected outlook.
US
US markets have surged on the open led by the Nasdaq 100, after the latest US CPI inflation report came in below forecasts, showing prices rise 7.1% on an annual basis, and the lowest level this year, down from 7.7% in October, while core prices fell to 6%.
The nature of another bigger than expected fall in the headline CPI number is unlikely to be lost on the various FOMC members as they get set to meet later today and decide on a 50bps rate hike tomorrow. The size of the fall, with a 1.1% fall from the levels we saw in September, may temper some of the enthusiasm for much more aggressive rate moves as we head into 2023.
The biggest movers have been in the sectors that are the most sensitive to a move in US bond yields with the likes of Alphabet, Meta Platforms, Nvidia and Amazon all performing well.
Moderna shares have also surged higher after its cancer vaccine collaboration with Merck met a positive clinical outcome in stopping the recurrence of melanoma skin cancer, although the results haven’t been verified independently.
FX
The pound held up well after the latest UK unemployment numbers showed a small increase to 3.7% for the 3 months to October.
Offsetting that increase, the number of payrolled employees for November rose by 107k to a new record high of 29.9m. Wage growth also saw a healthy increase, pushing up to 6.1% and the highest level outside the pandemic since 2001, increasing the pressure on the Bank of England later this week to push rates up by 50bps. The increase in payrolled employee numbers appears to suggest that people are returning to the labour market as the rising cost of living alters the economic calculus when it comes to paying the bills.
These sterling gains got extra traction after US CPI came in softer than expected at 7.1% and its lowest level this year, while core prices fell to 6%, below expectations of 6.1%, pushing the pound up through the 1.2400 level to a six-month high. Having seen PPI come in slightly higher than expected last week today's lower than expected CPI number has put the prospect of a shallower rate hiking cycle back onto the agenda for the early part of next year, sending yields sharply lower.
We’re also seeing some big US dollar losses against the Japanese yen, as well as the Australian dollar as markets price out how much higher rates might need to go, and how long they stay there.
Commodities
The weak US dollar has also given oil prices a lift, despite OPEC cutting its forecast for Q4 of this year, as well as Q1 2023. While predicting a short-term slowdown OPEC kept to its full year forecasts for 2022, as well as next year unchanged. After a slow start to the year OPEC expects demand to pick up once China can reopen fully, sometime during the second quarter of 2023.
Gold prices have finally managed to gain a foothold above $1,800 an ounce, pushing up to 5-month highs, as the US dollar and yields plunged in the wake of this afternoon’s US CPI number, which fell to 7.1%, and the weakest headline number this year.
Volatility
Commodity prices saw an active session to start the week, with petrochemicals finding themselves focus. Hopes of improved demand plus supply constraints after the closure of a key US pipeline saw West Texas Intermediate crude add more than 5% during Monday’s trade, but it has been the distillates that have seen heightened levels of volatility. Low Sulphur Gas Oil tracked crude higher, printing one day vol of 51.01% against 47.63% on the month, whilst a similar pattern was seen with US Heating Oil, where the one-day vol reading came in at 48.5% versus 45.27% on the month.
Some cryptos saw elevated levels of price action. A pronounced fall in the price of Bitcoin Cash against the US Dollar – it lost around 4% in a matter of minutes – pushed the asset to the top of the list, with one day vol sitting at 67.3% against 56.25% on the month.
Heavy selling in early trade saw CMC’s proprietary basket of stocks covering gold producers fall in early trade. Losses were recovered by the end of the session, and this doesn’t really tally with any meaningful weakness in precious metals prices, although there may be some posturing taking place ahead of tomorrow’s rate call from the Fed. One day vol on the gold share basket printed 55.77% against 46.83% on the month.
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