Macro Update and US CPI Preview

Okay, very good morning. It is Wednesday the 12th of May. Hope you're doing well. And I guess the theme to get you up to speed on yesterday's price movement is inflation anxiety, and that comes ahead of course for the US CPI report we're going to get this afternoon at 1:30 London time. But looking at the charts this morning across asset class, so just to refresh If you're, if you're watching this for the first time, you've got EURUSD cable top left, gold futures top right, DAX futures center left, NASDAQ futures middle, S&P futures right, and then you've got WTI crude futures front month futures at the bottom with the US 10-year down in the bottom right-hand corner. As you can see here, we've had a little bit of stabilization after what was looking, at least in the equity space, a fairly sensitive reaction to still the idea about What rising commodity prices, labor shortages prompting these fears that despite reassurances from the Fed that near-term price spikes, which we are anticipating, could morph into something more meaningful. Uh, big tech again, uh, fairly heavy. However, the NASDAQ did make a pretty resounding recovery having been down around 2% yesterday, actually finished around flat. And in fact, the Dow was down 1.3%. 6% at the close yesterday. Also, that specter of cost pressures was somewhat amplified by that Chinese, you know, inflation in terms of price pressures at the factory gate, where we saw prices there rise to a 3-year high of 6.8% last month year over year. But again, that year-over-year thing is what's important to a certain degree. And certainly we'll talk about the headline US inflation figure, which is expected at 3.6%. And we'll put that into a bit of context because definitely I think that that's not really the right number to be focusing on this afternoon, or one that I think we should be shocked by. Again, interestingly, I think from a, a general asset class point of view, I think the yield reaction, forex reaction, has been much more muted to that than the equity sensitivity at the moment. And I think that makes a bit of sense because equities obviously on the back of payrolls kind of bumped us up to the next record high level. So a little bit of space to come off potentially, and, you know, with this ongoing kind of moderate rotation that's been underway to a certain degree. But as far as this morning is concerned, a little bit of stabilization, in fact a little bit recovery in the futures. Let me just run you through a few different charts. Uh, here you've got, uh, the kind of double bottom forming from yesterday afternoon's initial low that we printed, which was around an hour after the open on Wall Street. After— you can see here on this quite big wick where we rallied and then dropped after initial open, and then we had a retest down around a similar level late in the Asia-Pac session where US participants have come in and just lifted it again. Upside here in the short term, S&P, quite interested to just keep an eye on the pivot level, short-term trend line going back to yesterday morning's UK S&P futures high that we had, had a couple of tests at that level. Be interested to see how we respect that pivot coinciding with that trendline near term. On the higher time frame, just zooming out a little bit, yeah, really important on the daily that we actually held up at this rectangle level. That's what we were looking at yesterday, which was that area of support that's been in play really through April, mid-April, and also through May so far. And despite the heaviness of some of the initial downside that we saw yesterday materializing the price held up at that level and we closed firmly above it. And again, we've had a retest in the overnight Asia Pacific session and a firm bounce once again. Uh, on that point, again, interesting on the technicals on the higher time frames for the NASDAQ as well, in a somewhat similar fashion. So here, just looking on the, uh, 120, and you can see this is what we were really looking at yesterday those previous highs that we had in late March, that fib retracement of the 25th of March low to the record high that we had on, uh, late, I think, 29th of April. And it really pushed through there quite quickly, uh, had a little hesitation at that level, then dropped down, uh, yesterday when we were seeing some of that initial pressure down to that low you can see back here on the 31st of March. And then we saw this really strong recovery from the low And then it's just drifted a little south in the Asia-Pacific session. Asia as a region generally was lower following that kind of weaker handover from the States. Taiwan was a particular weak area. They were down as much as 6% at one time, falling from all-time highs on the back of fears it might raise its COVID-19 alert levels in the coming days. They were a particular standout on the downside. Um, but a few things here then. On the daily on the NASDAQ, this is something we were looking at yesterday, which is that 100 DMA, the blue line, and again that, that kind of horizontal resistance turned support level. And we looked like we were firmly through that 100 DMA, but because of that ramp that we saw shortly after, I think it was around the European close, then we actually closed above it. So for now, uh, that we continue to watch this with interest. And obviously today's number could well be the catalyst to whether or not we've now seen the weekly low, or do we in fact then continue to push lower. We'll discuss CPI in a moment, but just top level, again, I can't help but feel like there's a potential here for a bit of buy the rumor, sell the fact, and people have kind of bought the rumor in the sense of getting a bit overhyped on the inflation side of things. And when inflation materializes, of which I think is to be expected, perhaps then we get a bit of a relief of, oh, it's not, it's not so bad. And actually we just grind back a little bit of the losses that we've accumulated over the last two trading sessions. Wouldn't surprise me at all if we get that type of reaction later on this afternoon. Currency markets, the DXY was a little firmer overnight, but as Europe has stepped into the markets, weakened a touch. You can see here cable, EURUSD, just generally respecting a near-term range for the moment. You can see that quite well defined here on the 30-minute chart in cable futures. You've got the S1 and that range low just providing a nice kind of platform for range-bound trades at the moment. And be looking on the same on the top side. You can see the R1 lining up nicely with yesterday, yesterday's high in the futures that we saw around 6 PM London time. Uh, the other markets, just having a quick look, um, the energy market, probably the next one to focus on. Um, and just looking at that here, a couple of news items just to update you on. Did have the API crude oil inventories of course last night, and this front runs the DOE's we'll get later. The headline crude number drawdown 2.533 million Expectations were for 2.1 million. Cushing draw 1.2 million. Gasoline, though, was the biggest build since April of 2020. That came in at 5.64 million. Overall, though, in terms of a reaction effect on what we saw on the price last night on the back of that data was basically nothing. Again, the headline crude figure was basically in line. So at the moment, just looking at this range, um, that's been forming here in WTI Uh, and we had a nice respect of that area at around $65. So $65 to handle, as you can see here, was that double bottom that we printed back at the beginning of the week on Monday. That then acted as nice resistance through the transition through Monday, Tuesday, a little bit choppy then late yesterday, but a respect of that and the $65 handle, we've just bounced back up upside here. Again, just keeping an eye on that high that we saw, the recommencement of trade after that gap up that we saw in the Colonial Pipeline cyber attack at the weekend. On the Colonial Pipeline, the energy secretary in the US has said that the Colonial CEO indicated they'll make a decision today regarding a full restart, which will take a few days to be up and running, but that very much is expected at this point. You know, interestingly, although equities were souring and, you know, I saw lots of tweets, people kind of pumping, looking for a 1,000-point Dow down day, and obviously we got nowhere near that. It was probably about half of that. But people were kind of salivating at the idea of a bit of a meaningful sell-off. As far as the energy market is concerned, particularly oil, I just find it very hard to see what can force this oil price down because being a tangible physical product like oil with this reopening, that whether it happens now, next week, next month, the global economy will be going through various phases of aggressive reopening. Which is going to see very strong pickup in commodity prices across the board, which of course is what we've been seeing in the likes of industrial base metals in particular, the likes of being led by China going through this kind of growth spurt at the moment. And that will be magnified, if you like, or amplified, I should say, by other regions following suit, whether now or in due course in the weeks and months ahead. So do find it hard to see any type of sustained downside in crude oil. OPEC will continue to kind of play their hand in keeping price underpinned or supported in that sense as well. And so you've kind of got a downside protection in that form. So we still remain quite bullish overall for oil prices going forward. A couple of things then to have a chat about, and really it is about US CPI. That is the main focal point perhaps for the week, definitely for the day, because got retail sales as well coming out on, on Friday from the US, which will be equally interesting. But a couple of things I wanted to talk about, uh, and I've got this picture of Fed member Brainard, who is a board member as well as a voter then, and sitting on the board means she sits there for a number of years rather than a rotational president. So she's right up there, seniority, and she had some comments yesterday that I think were very meaningful. But in order to paint the picture, headline US CPI today is expected at 3.6%. Now here we are, the previous reading was 2.6%, and that puts us back to basically where we were prior to the pandemic really kicking off. And you can see we fluctuated, but generally speaking, we sat around that kind of 2% area, which was the previous, uh, inflation target that they had. We know now though that the Fed have adopted an average inflationary targeting kind of mechanism. Today inflation is expected to go up to 3.6%, and actually if we just skip over to the calendar and if we have a look at that the actual range is we could see an upside number of 3.9%. So let's say 4%. That puts us right up here at the peak that we were seeing going through all the way back to the last financial crisis, which was where we had the big drop-off during the subprime crisis. Then we had the recovery and the big pickup in inflation that ensued thereafter, going through the various forms of QE and policy response and so on. and at that point we did peak up at around that 3.94% level. Now, couple of things here. For one, I find it very hard to see how anyone can be shocked by the idea that inflation on the headline year-on-year reading is rising very fast and it's gonna print a very high number. Um, I do feel still that the market is a little bit overly sensitive to this idea of just looking at the print and being shocked without really applying the context of obviously on the year-on-year basis, if you think back to the April-May period, inflation was dropping like a stone at the time. We were just coming on the back of the negative oil price that we had at the time with that issue at Cushing and with the total demand destruction that we had for commodities generally, globally, as we went into the major, most strict national lockdowns across the world. Now we're going through this state of reopening, inflation is going to ramp up. So yeah, I don't, I don't think it's a great deal of surprise. And I definitely side on the basis of what the Fed are saying, you know, and really listening to them, because so far they've been right. And one of the comments that Brainard said, I think, that was important yesterday is that to the extent that supply chain congestion And remember, that's a big thing that people are looking at because, you know, this kind of squeeze, if you like, in, in lumber or iron ore, copper, these other metals— the idea here is that instead of being transitory, the market's been fearful, and hence the increase in inflation expectation gauges, that it goes beyond temporary in nature to something more long-lasting because of these bottlenecks, if you like. But what the Fed are saying is that to the extent the supply chain congestion and other reopening frictions are transitory, they are unlikely to generate persistently higher inflation on their own. A persistent material increase in inflation require not just that wages or prices increase for a period after the reopening, but also broad expectation that they'll continue to increase a persistently higher pace. That very last bit, you know, okay, beyond the coming months, quarter, as we go through this reopening, what does inflation look like then? Of course, the tail risk here is that inflation does become something more long-lasting. The Fed are late to react. They need to go big and hard in order to temper then inflation if it is more consistent. That would have much more financial negative consequence because then they would be having to act more forcefully in a policy tightening maneuver, which markets will not like. But again, for the moment, what these guys are saying— and it's not just Brainard, they're all saying this at the moment across the hawk-dove spectrum— is the same thing. Again, if you want to kind of get down into that conversation a little bit more, check out the Market Watch podcast that we put out every Friday. Piers, the head of trading, and I had a really great chat about this transitory argument and how valid is it and the rationale behind what the Fed are thinking and what the markets are thinking, that kind of contrast in view at this present point in time. So if you just go on that podcast, have a listen, it's well worth it to see us, see Piers's view on that as well. Perhaps then the better figure to look at today is the core reading, and that's expected to rise to 2.3% year-on-year. This is also a meaningful pickup on the previous 1.6%. However, again, in contact— in, in context, we've just had that fairly weak jobs report last week on Friday. The Fed are very jobs-focused, as we know, and so hard to see this figure really moving the needle for, A, the point that a ramp-up is expected, and then, B, the idea that the other key component of the economy is lagging at the moment, which is the labor sector. So Yeah, I think today definitely is going to draw a lot of attention. I think it's going to be definitely a catalyst. I'd just be a little bit mindful of just kind of looking at it in the binary fashion that high inflation— the media is going to have a bit of a fan, like a real fan fest with this, where they're going to be like, biggest lift in inflation in XYZ, it's the highest number we've had since ABC, and it's all going to sound quite negative. But you need to disassociate yourself with that. Think about where markets' expectations reside and what the consequent impact and reaction could be thereafter, because increasing inflation isn't necessarily bad for stocks. It depends on how far it deviates away from the consensus estimate. And remember, the top end of the range is 3.9%. So if we start busting 4.2, 4.3s, yeah, fine, you're going to get a dollar reaction, positive yields will pop, and equities might weaken. But if we do get a 3-point, um, even if we get a forecast-beating figure and we see a 3.7, a 3.8, beyond initial volatility, it wouldn't be surprising if the market then just breathes a sigh of relief, as we've seen before with inflation figures in the US. We actually go, actually, it's not that bad, and the market kind of goes about its merry way, for the time being at least. So yeah, quite a lengthy conversation on that. That is the key metric for today. Otherwise, quick look at the calendar. We've already had the UK GDP figures come out. Um, they came in month to month for March at 2.1%, quite a bit stronger than expected, 1.3%. But as far as the reaction in cable is concerned, I talked about this in my end of day wrap yesterday for the guys in the community. It kind of fits the narrative. It helps keep cable obviously up at these higher levels. Following that big breakout rally we had at the beginning of the week for the reasons we've discussed at length. And so for the time being, the reactions just helped us get it back up to pivot, but we're mid-range at the moment of the range that's been materializing through the week so far. So no great surprises there. We have been reopening. This would capture the schools reopening, and your GDP figure in the UK is going to continue to pick up as we go forward in time. Otherwise, final things on the calendar to be aware of other than those major events. You do have the EU industrial production number at 10 AM this morning London time, order book trees usual at 3:30. Speaker-wise, Bank of England's Bailey speaks again, but at a swaps and derivatives conference. I'm not expecting really anything there, and he spoke yesterday, and we had the Bank of England just last week, so there's nothing new I don't think that you need to prepare for for Bailey. I think you can go about any potential trades without too much risk associated with him speaking. Um, from the Fed, Clarida, who is a voter of senior stature at the Fed, speaking at 2 PM. You got Bostic, voter at 6, Harker, non-voter at 6:30. And then you've got $41 billion in a 10-year note auction as well coming out the States at 6 PM. A lot of DAX-focused corporate earnings as well pre-market. Um, so Allianz, Bayer, Commerzbank, Deutsche Telekom, all to have a lookout for as well. As far as the DAX is concerned this morning, uh, just going through early European trade, again respecting a relative range. You can see here you've got the pivot level, you've got the double top from yesterday afternoon and late US session just coinciding up and around the same area, and the respective double bottom as well from yesterday, which was around the 15,000 mark as well. All right, that is it. So gonna let you guys get on with the day. Have a good one. Um, again, I'll see you in the chat room. And yeah, take care.