10th September - Mixed PPI & Continued Escalation
There were two key news events today, the US PPI data release and the escalation in the Middle East.
First off, we saw the hotly anticipated PPI print for the US, which came in mixed but slightly hawkish. PPI m/m was in line with expectations at 0.4%, Core PPI m/m was below at 0.2% against an expected 0.3%, PPI y/y was above at 5.4% against 5.3%, whilst Core PPI y/y was in line at 4.6%. The other key thing to note was that last month's PPI m/m & PPI y/y were both revised upwards. Overall, it is worth noting inflation overall has risen from last month (0.6% for PPI y/y) but revision higher for last month against an otherwise mixed data release has meant we now sit at a 70% expectation for rate hikes next week.
Secondly, we saw continued escalation in the Middle East. Iran has said it attacked 10 vessels near the Strait of Hormuz, in retaliation after the US destroyed five Iranian oil tankers. Iran's Revolutionary Guard has also threatened further escalation, whilst Iran-aligned Houthi forces were reported to have seized Yemen's key Red Sea port of Mokha. All of this has combined to generate significant concern with the situation in the region and its effects. Brent Crude Oil has risen 5.5% to $109.10 per barrel, whilst US Oil has risen 5.6% to $99.60, having briefly touched $100 over the course of the day. These are the highest levels since May and carry with them significant inflation effects for the entire globe.
These two factors have also hit the bond markets hard, with yields rising across the curve despite the US Treasury's attempts to reduce longer-term yields. The US 30-year yield is now at its highest since June 2007, close to 20 years ago. This has risen in large part because of the expectations for a Fed rate hike next week, as well as the growing expectations that the Iran war will last longer than hoped and will keep rates higher for longer.
This presents a significant issue for US Treasury Secretary Bessent, who, despite advising he will spend to protect the long end of the curve, has seen these yields continue to rise. Will the intervention that began this week start to take effect over the next few days, or will the caution surrounding the markets at the moment overwhelm any attempt he has made? If it does, does the US intervene at higher levels? We also have the contrast with the FOMC, who now seem likely to raise interest rates, which will go against the Treasury's goals. Both have conflicting goals, and both cannot win in the short term.
Forex
The most striking thing about today was how little the dollar did. We have had annual producer inflation accelerate 0.6%, rate hike expectations move to 70%, and the 30-year yield reach its highest level in almost twenty years. On any conventional reading, that combination should be strongly dollar positive. The DXY sits at 99.000, which is almost exactly where it has been all week. EUR/USD fell 0.05% to 1.1628 and GBP/USD fell 0.12% to 1.3529, which are not the moves you would expect on a day like today.
This is the same problem I have been writing about for weeks now, and it is becoming increasingly difficult to explain away. A currency that will not rally on hot inflation, rising yields and an imminent rate hike is not being traded on rate differentials. It is being traded on confidence, and there is not a great deal of it about at the moment. The Treasury and the Fed pulling in opposite directions does nothing to help that. If anything, the intervention in the bond market makes the problem worse, because it suggests the authorities themselves do not believe the market will clear at these levels without help.
The yen was the one pair with any real movement, with USD/JPY rising 0.38% to 154.085 having reached a high of 154.67. Notably, it also touched a low of 153.275 during the session before bouncing away again. That is now the second time it has approached 153.000 and been rejected, so that level is holding for the time being and the carry trade unwind I flagged earlier in the week has not yet been confirmed by price. I still think that is the direction of travel over the longer term, particularly with the BoJ expected to hike next week, but the market is clearly not ready to break it yet.
Indices
A uniformly negative session, with almost every index in the red and remarkably little difference between them. The Dow fell 0.73% to 52,051, the Nasdaq 100 dropped 0.99% to 29,142, the S&P 500 fell 0.64% to 7,593 and the Nasdaq Composite lost 0.50% to 26,110. The Russell 2000 was among the worst of the US indices, down 0.95% to 2,895. Internationally, the DAX fell 0.82% to 25,331, the Nikkei 0.53% to 63,999, the FTSE 100 0.50% to 10,590, and the Kospi was the most resilient of the lot, down just 0.25%.
The detail that caught my eye is the split within the Nasdaq. The 100 fell almost twice as hard as the Composite, 0.99% against 0.50%, which is the exact reverse of yesterday when the 100 fell 0.17% and the Composite 0.61%. So the mega-cap names that held up so well on Wednesday took the brunt of it today.
That is worth flagging because it means the narrowing breadth concern I raised yesterday needs some qualification rather than simply repeating. When the largest names lead the decline, the issue is not concentration, it is that the biggest and most rate-sensitive stocks are being repriced. With yields where they are and a hike now 70% priced, long duration mega-caps are the natural casualty, and the Russell 2000 falling 0.95% fits the same explanation given how rate-sensitive small caps are.
The uniformity is really the point here. There was no rotation today, no sector or region that offered any shelter. Everything fell, and by broadly similar amounts. That is what a market repricing rates looks like, rather than one worrying about growth or company earnings, and it is a fairly clean read on what is driving things at the moment.
Precious Metals
Gold fell 1.13% today while silver fell 5.5%, having traded as high as $68.98 yesterday. The gold to silver ratio has widened from around 65 to 68 in a single session, which is a substantial move in a day.
That divergence is the story, and I think it is being misread as a simple reaction to the data. Look again at the PPI print. Core PPI m/m, which is the cleanest measure of underlying pipeline pressure and the one the Fed watches most closely, came in at 0.2% against an expected 0.3%. It was softer than forecast. That is not a release that justifies a 5.5% collapse in silver.
So the data did not do this. Positioning did. Silver had run roughly 8% in five sessions, from $63.88 up to $68.98, and it gave essentially all of that back today. That is what a leveraged unwind looks like, a crowded trade meeting a release that offered nothing fresh to sustain it, with the annual acceleration providing sellers an excuse rather than an actual reason.
Gold's 1.13% fall is far more explicable and, I would argue, still supports the point I made yesterday about metals regaining their safe-haven status. Headline producer inflation at 5.4% keeps the hike case very much alive, and a fall of just over 1% in that environment is a contained response. The safe-haven bid appears to be holding underneath gold in a way it clearly was not for silver.
The read for me is that these two metals are now telling different stories and should be treated separately. Gold is trading on the macro picture. Silver is trading on who owns it. Tomorrow's CPI gives us a clean test of that, because if gold again falls only modestly while silver continues to bleed, then we can say with some confidence that silver's move today was never really about inflation at all.
Tomorrow's Market Drivers
US CPI, 1:30pm UK time - The final data before the FOMC on the 16th. After today's split print, this decides it. Watch whether the monthly core stays contained while the annual rate accelerates — the same pattern would leave the Fed with an unambiguously difficult decision.
UK GDP, 7am UK time - Relevant for GBP, but overshadowed.
Day two of the Treasury's bond purchases, now scaled to up to $6 billion.
The gold-silver divergence. If gold again falls only modestly on a hot CPI while silver keeps bleeding, the split is confirmed and silver's move was never about inflation.
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