11th September - Hot Inflation, And Still No Dollar Movement
The main event today was the US CPI print, the final piece of data before the FOMC meets next week, and like yesterday's PPI it came in mixed with a hawkish element buried inside it. Core CPI m/m was the hot one at 0.3% against an expected 0.2%, it is worth noting that this is the figure the Fed watches most closely. Elsewhere it was steadier, with CPI m/m in line at 0.4%, CPI y/y in line and unchanged at 3.4%, and Core CPI y/y in line at 2.4%, which was actually down from 2.5% last month. We also had a strong UK GDP print, coming in at 0.4% m/m against an expected 0.0%.
So we now have a full week of inflation data behind us, and taken together it has been slightly hot. Annual producer inflation accelerated 0.6% yesterday, the monthly core consumer figure beat today, and both prints came with upward revisions attached. A rate hike next week is now priced at around 85%. On any conventional reading of markets, that combination should have done two things. It should have sent the dollar higher, and it should have knocked the metals down hard. Neither has happened, and this feels like the story of the week rather than the data itself.
The other significant factor today was oil, which reversed sharply after yesterday's surge. Brent fell 3.74% and US Oil 4.06%, giving back a good chunk of the 5.5% gain we saw yesterday on the back of Middle East escalations. That reversal is the key to understanding almost everything else that happened today, and I will come back to it in each section, because it drove the bond market, the equity market and the metals in turn.
Forex
The DXY fell 0.02% today. That is essentially zero, and it comes on a day when the core monthly inflation print beat expectations and a rate hike next week moved to 85% priced. It is now the third consecutive session in which the dollar has refused to meaningfully respond to news that should, on any traditional reading, be supportive of it.
I have been writing about this for weeks and it is becoming harder to explain away as noise. A currency that will not rally on hot inflation, on yields at twenty-year highs, or on an imminent rate hike is simply not being traded on rate differentials any more. It is being traded on confidence in the underlying economy, and there is not much of that at the moment. You have a Treasury actively buying its own long-dated debt because it does not believe the market will clear at these levels, a Fed that looks set to hike directly against that goal, and a war in the Middle East that is now widely expected to run considerably longer than anyone hoped in June. None of that encourages foreign capital to hold dollars, regardless of what the yield on offer is.
That last point matters more than it is being given credit for. Higher yields are supposed to attract capital, and the reason they normally support a currency is that foreign investors must buy dollars in order to buy Treasuries. If yields keep rising and the dollar keeps refusing to follow, the explanation is that the buyers are not turning up. That is the same conclusion I reached in early August and nothing this week has changed it.
Elsewhere, sterling gained just 0.09% to 1.3523 despite a GDP print that beat expectations by a considerable margin, so even good domestic news is struggling to move currencies at the moment. USD/JPY fell 0.48% to 153.676, with a low of 153.234, meaning it is now testing the 153.000 level for a third time. That is the most interesting technical situation in the majors, with three approaches and two rejections up to this point, and a BoJ hike expected next week. If it breaks, I would expect the move to be a significant one.
Indices
A complete reversal of yesterday, and it came almost entirely from the oil price. The Nasdaq Composite led at 1.18%, with the Nasdaq 100 up 1.08%, the Dow 1.01%, the S&P 500 0.95% and the Russell 2000 0.67%. Internationally the Nikkei was strongest at 1.20%, with the DAX up 0.86% and the FTSE 100 0.58%. The Kospi was the only index in the red, down 1.76%. The VIX collapsed 12.21%, which is a very large single-day fall and tells you how much relief the oil move provided.
The bond market explains the rest. The 2-year yield rose 0.63%, but the 10-year fell 0.20% and the 30-year fell 0.37%, with the UK 30-year down 0.27% as well. That is a flattening curve, and the mechanism behind it is straightforward. The hot core CPI keeps a hike next week firmly priced, which lifts the short end. But oil falling 4% directly reduces long-run inflation expectations, and that is precisely what the long end prices.
That gives Bessent his first decent day in a fortnight. I have written repeatedly that his intervention will likely fail, with yields currently sitting higher than they were before the buybacks were even announced. Today the long end finally came down. The honest caveat is that it looks like oil did the work rather than the Treasury, but if crude stays lower it may at least allow the buybacks to gain some traction rather than fighting an inflation impulse they were never going to beat.
Notice too that the Nasdaq led both the fall yesterday and the rally today. That confirms this is a rates story rather than a growth or earnings story, and it is why the oil price has become the single most important input into the equity market at the moment.
Precious Metals
Gold rose 1.18% today and Silver 1.42%, with Gold closing around $4,409 and Silver at $65.00. Both had traded lower during the session before recovering, with Gold dipping as far as $4,333 and Silver down to $63.15, which was below yesterday's low, so the buyers stepped in at levels below where we finished the week.
The interesting part is that this happened at all, and it makes the same point as the dollar. A hot core CPI print, on a day when a hike next week is 85% priced, should have pushed both metals lower and kept them there. Instead they absorbed a fresh low and finished higher.
Look at the week as a whole. We have had two inflation prints come in on the hawkish side, annual producer inflation accelerate 0.6%, and rate hike odds move from around 58% to 85%. Silver fell 5.5% yesterday and Gold just 1.13%. And here we are at the end of the week with Gold back around $4,400 and Silver having found support around $63, which is roughly where it started its run a fortnight ago.
That is not a collapse. Under the framework that governed most of this year, a week like this one would have taken the metals apart. It has not, and the reason is the same as the reason the dollar will not rally. The market is buying protection against uncertainty rather than chasing returns, and the uncertainty is not really about inflation at all. It is about a Treasury and a Fed pulling in opposite directions, a bond market demanding twenty-year high yields to fund the US government, and a war that shows no sign of ending any time soon. Every one of those arguments survives a hot inflation print intact.
Silver is worth watching most closely from here. It has now had its positioning flushed out, having given back the entire 8% run it made over the previous five sessions, and it has found a floor at $63. A metal that has been cleared out like that and then holds its level is in a considerably healthier position than one that has been grinding higher on leverage, so if the macro picture stays as it is, I would expect Silver to be the better performer of the two from here.
Next week gives us the FOMC on Wednesday and the BoJ on Thursday, and between them they should tell us a great deal about whether that holds.
Next Week's Market Drivers
FOMC, Wednesday 16 September - A hike is around 85% priced. After a hot core CPI and hot annual PPI, the decision looks close to settled — the guidance is what matters.
BoJ, 17-18 September - A 25bp hike to 1.25% is fully priced, with USD/JPY sitting on 153.000.
Oil Prices - Today's reversal drove the entire risk-on move. If it reverses again, so does everything else.
US long term yields - The 30-year fell for the first time in weeks. Watch whether that holds or whether it was purely an oil effect.
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