US CPI Expected At The Highest Level Since 1982

Okay, very good morning to you. It is Friday the 10th of December. Hope you're doing well. And gonna talk about US CPI. We'll do a short preview to kick things off first, and then we're going to talk a little bit about Boris Johnson and apparent Tory rebellion on the table. Then China Evergrande moving into a restricted default. What does that mean? Is it important or not? Bloomberg Economist Survey update from the ECB and the timing going into their final rate decision about what they're going to do with hinting towards then the QE program, their pandemic emergency purchase program, and the APP. And then a quick word on Tesla because Elon Musk has continued selling his shares for a fifth straight week, fulfilling his pledge to get rid of 10% of that holding that he has in the EV maker. So that's what's on the agenda. Very quick look at the charts and not going to spend too much time here. Overall, we've had a lower close on Wall Street, losses of 0.7% in the S&P, the most severe loss in the NASDAQ, down 1.7%. But that again, reflection of the outperformance that it's seen following a 3-day consecutive winning streak. So a bit of a pullback after those moves. This morning you've got the dollar index just picking up a little bit as Europe has stepped into the market. Yields also likewise to the US 10-year down here in the bottom right, down 9.5 ticks this morning. Equities also a little bit softer through the APAC session following that lower close on Wall Street. If anything, you could say perhaps a little bit of prepositioning then ahead of what is of course anticipated to be a super hot inflation reading coming out of the States at 1:30 this afternoon. Why the big attention on this figure? Well, remember, for the Fed, it really comes down to two major forces to determine their decision-making from an economic point of view, and that is inflation and the labor market. The other thing, of course, is going to be Omicron as we go forward. But following Fed Chair Powell's comments we saw just last week, where he no longer viewed inflation as, quote, transitory— eyes then firmly on this— is the final piece of kind of intel that we get before next week's, on the 15th, final FOMC meeting of the year. and a lot of the hints have been laid down around the acceleration of tapering, of course, in January. And then that would mean the commencement of that winding up by March, at the end of Q1 of next year. This is a look at where CPI stands at the moment on a year-on-year basis, and you can see the previous reading came in at 6.2% year-on-year. And in fact, that was the highest reading we've had in 31 years. If today's number comes in as expected, So expected is 6.8%. The top end of the street's actually looking for a figure north of 7%. But even at consensus, that would mean the highest figure since 1982. If the core comes in, in line, it'd be the highest reading since June of 1991. Now, one of the things then, um, well, a couple of things to be aware of here. One is the fact that inflation obviously has become more acute of problem than what the Fed had previously foresaw in previous months, and hence the reason why for this hawkish pivot that we've had from them. And you can see here the actual CPI prints and then what's expected. So today's one up right up here, expected to be generally the peak and then fading as we go further through into 2022 to cool off a little bit and move somewhere back towards the target value of around 2% or thereabouts. The, the concern, of course, has been that just generally speaking, the, the movement has gone from being a kind of idiosyncratic result of the pains of reopening after the bottlenecks we had experienced due to the pandemic to a more broadening out of inflationary pressures. One of the biggest ones you can see here, the shift in components that we saw that that led to the heightened figure last time as this yellow bar, and the yellow bar being then energy. And energy had been, if you remember, on an absolute tear for a number of weeks. On that point then, if then energy is becoming a more larger component of this, remember the data we're going to see for this reading is November. And actually the, the actual kind of survey period of what that data captures doesn't really then take hold of some of the pullback we've seen quite aggressively in oil. So one of the things that we had yesterday, an attempt to kind of front run what's expected to be an incredibly high figure, which obviously is going to be kind of sensationalized in the mainstream media, is US President Joe Biden and his team have all been out looking to front run today's figure and control kind of the optics by suggesting then that the US inflation data due out today does not reflect the recent decline in some prices including energy. And just to give you an idea, energy prices obviously have come off as much as 15-20%, and that won't be reflected in this report. We'll have to wait until obviously the next one that comes out. So that's quite, quite usual practice, obviously trying to get ahead of the game to offset and mitigate any negativity of what then the public perception would be on the economic kind of handling of the administration being a failure if then prices start to really impede people's lifestyle on the street, i.e., if it severely outpaces wages. Now, a couple of other things then to finish off. I'd say this figure overall is not that surprising. The inflation figure is expected to go up. Really, I guess what could really disturb then this idea of tapering being accelerated and so forth, which is the general market consensus at this point of time, is going to be Omicron. At the moment, it does appear that Omicron is highly transmissible but of a more kind of mild nature to that comparative to, say, the previous strain of Delta, which is still much more prevalent on the global level. If that were to change between now and next week's meeting on next Wednesday that being that it becomes proven more lethal perhaps than what we generally believe at this point in time. That's really the only thing that could disrupt, I think, right now the overall process of just a faster tightening process going forward. So yeah, today's figure, it really depends. There's going to be a lot of knee-jerk volatility, of course, the intraday session. How much does it really change things? Well, I don't think a great deal at this point because it's very much expected to come in on the high side. So it's going to be interesting to watch nonetheless. All right. Before I move on to talk about some of the other stories, do not forget that we have a new podcast episode. If you just jump onto Spotify or Apple Podcasts and search Amplify Me Market Maker, you'll be able to find this. And we release episodes every Friday. Myself and the head of trading have a bit of a conversation informally about some of the major themes of the week. And so we'll give you our take of the CPI number when we record that after the report comes out later today. So don't forget to check that out. All right. The other news stories of note, not that I think this is particularly pound sensitive in the, in the very immediate intraday environment, but it certainly does have ramifications in the more medium term, is Boris Johnson said to be braced for a big Tory rebellion over COVID measures and amid discontent over his handling, of course, on the row Christmas parties in Downing Street last year. I've just actually seen a tweet come out from a UK journalist who was saying along the lines of they were planning through WhatsApp messaging, um, 3 weeks sending out invitations to all the politicians from Number 10 whilst of course the UK was in full lockdown. So this really going down like a sack of coal at the moment for Boris Johnson. And it comes ahead of conservative unrest playing out ahead of a highly problematic parliamentary by-election. If you watch local news or BBC News and the news at 10, 10 o'clock and so on, you probably read about this a lot. If you're not in the UK, you probably won't even be on your radar, but an area in North Shropshire where the Liberal Democrats hope to overturn around a 23,000 Tory election— the Lib Dems actually finished third the last time there was by-election there in 2019. Conservative MPs were already aggrieved by the way the Prime Minister dealt with the sleaze scandal that culminated with Owen Paterson quitting as the Tory MP for Northropshire, hence this new by-election. Now, is that area particularly specific? Well, no, it just generally acts as a bit of a litmus test of overall national sentiment at the moment. As Boris has become under increasing pressure on multiple fronts. And what this has led to is the UK Labour Party, according to the latest YouGov Times Westminster survey, is now ahead of the Conservatives with a 4-point lead. Wouldn't read too much into that at the moment, but it just goes to kind of show the general sentiment at this present point in time. All right, other things to quickly comment on. Evergrande is defaulted. Sounds pretty scary as a headline. It really doesn't matter a great deal. Evergrande's stock price overnight I think was down about 2%, but remember this company was seeing monster moves a few months ago. And the main rationale there is basically that everyone's expecting this to happen. They're going to go into restructuring, so a lot of the headlines you're seeing at the moment have a somewhat degree of inevitability about them. Fitch Ratings cut Evergrande to restricted default over its failure to make 2 coupon payments by the end of a grace period on Monday, and hence what's triggered this latest action. Fitch applied the same default label to Kaiser Group Holdings, which also failed to make some dollar-denominated payments earlier this week. The main kind of reason there that not only because it's expected but also dual fold given the fact of course as well. Chinese authorities have been fairly active to look to cushion some of this expected proceedings that are going to go forward in time. The other thing then is Elon Musk. I mentioned briefly at the beginning that he's offloaded further shares, so he actually sold another 934,000 shares for some just over $960 million to pay for taxes. On the exercise of 2.2 million, um, options according to regulatory filings that came out last night. So for context, that brings the total amount offloaded so far since he did that Twitter poll a couple of weeks ago to 11 million, leaving 6 million more to hit that target. So likelihood is this isn't going to stop anytime soon. Also overnight, you might have seen Musk did tweet that he's thinking about quitting his jobs and becoming an influencer full-time. How much seriousness you should read into that? I think very little. How often have Piers and I talked about Elon Musk eventually stepping down from Tesla? I think that is going to happen at some point in time. I don't think this tweet is necessarily a real telling sign that that's going to happen imminently. It's just Musk being Musk and causing more drama on Twitter. And then the final thing, just a quick word, is the ECB and the latest Economist poll conducted by Bloomberg. This happens typically on the week running into a major interest rate decision. We get them for the Fed, the Bank of England. This is the ECB, and the findings are sometimes quite interesting. This one suggests the ECB will seek to cushion the exit from emergency bond buying next year before a stronger inflation outlook allows for an end of all quantitative easing in 2023, is the timeline they're looking for. In terms of what to expect, policymakers will decide on Thursday, so next week, to stop purchases under their €1.85 trillion pandemic plan in March. Remember, this was the top-up one of that pretty huge envelope commitment to buy bonds as a response to pandemic, on top of their more standardized asset purchase, APP, APPP program. And what they're going to do to smooth the transition of ending the bigger one is increase the smaller existing one. And expectations are from economists that that's going to basically double from $20 to $40 billion purchases per month in under the APP for 3 months, and then tail that down incrementally to then come back to the the original level by the end of next year. So a smoothing out effect of the withdrawal stimulus, essentially. This isn't new information. This is very much what the markets are expecting, more broadly speaking. In terms of the data, what we've had— sorry, this is Thursday, so I'm gonna jump to Friday, which is here. So we've already had UK GDP come out, everything in line. No great surprises there. No reaction to pounds, I'm not going to waste my time talking there. US CPI really is the main event for the day, for the week really, from a, from a data perspective. Again, the headline expected at 6.8%, the core reading 4.9%, top end of expectations on the street 7.1%. The University of Michigan sentiment prelim number for Dec comes out thereafter at 3 o'clock. Speaker-wise, Panetta speaking off topic on digital currencies at 10 AM, and then that is it. So with that, I wish you a good day ahead, a fantastic weekend. Stay safe wherever you are, and don't forget to check out the podcast episode which will come out later today. All right, take care guys, have a good one.