15th July - Warsh Dampens Blockbuster CPI Print
- 20 hours ago
- 6 min read
Yesterday saw the release of June's CPI prints, which were the first to capture the falling oil prices after the MOU was signed in Iran last month. As expected, inflation fell, but markets were surprised by the size of the fall. CPI y/y fell to 3.5% against an expected 3.8%, CPI m/m was -0.4% against an expected -0.1%, Core CPI y/y was 2.6% against an expected 2.8%, and Core CPI m/m was 0.0% against an expected 0.2%. As a result, all measures of CPI showed a larger fall than expected, with the -0.4% CPI m/m figure being the largest fall since April 2020. This was a genuinely consequential print, and markets reacted immediately.
However, no sooner had we seen the dovish prints, we then heard from Fed Chair Kevin Warsh in front of US Congress. He made a point to say the following - "There might be some that look at this morning's data and say, 'Oh, mission accomplished, everything is swell.' That is not my view." He specifically told the markets not to celebrate the CPI figures and that this would not affect his hawkish stance. At the end of the day yesterday, September rate hikes were still considered more likely than not, despite the blockbuster CPI prints.
This commentary from Warsh, coupled with the theory from yesterday that a dovish print would not have the same effect now that we are seeing oil prices rise again, meant the market reaction was not as extreme as we may have otherwise expected.
Adding further to this narrative was yet another day of rising oil prices yesterday. There were further strikes from both sides in the Iran war and further rhetoric from the White House to muddy the waters. Trump rowed back his 20% levy threat from yesterday, but instead stated that he would be making deals for Gulf states to agree on large investment deals into the USA. He also stated that he would bomb buildings and power plants if the Iranian regime did not come back to the negotiating table to hammer out a deal. As a note, this bombing of civilian infrastructure would be against international law, so it is almost certainly just another chip being used by the President to get us closer to a final resolution. At present, that seems some way off, but as we have seen numerous times over the course of this war, this can change at a moment's notice.
Forex
The main news of the day was, of course, the CPI print, which pushed the DXY down on release as would be expected. However, the comments from Warsh meant that the actual move on the day was only 0.34% down to around 100.930, which is just about the same level as the DXY was at the start of the week. The implication is that markets are now looking past this print to the release next week, and how much that will be affected by rising oil prices over the past week. Warsh's comments were then the added dampener needed to mitigate a lot of the potential movement we would have otherwise seen on the day. As one analyst put it, "the June data describes a world — cheap oil, reopening Hormuz — that no longer exists." September rate hikes were priced at 75% probability before CPI, but after were still at 63%, meaning rate hikes are still expected and the rate hike cycle could still have some way to go yet.
Outside of the USD, the CAD continues to have strong support as oil prices continue to rise. The AUD and especially the NZD saw a lot of strength yesterday on moves into risk-on assets. The NZD in particular was a beneficiary, as the recent hawkish RBNZ stance gave it a differential against other currencies and boosted flows into the currency. The NZD/USD is now coming into a key level of resistance on the daily chart at 0.58300, which is also where we are currently seeing both the 100 and 200-day EMAs, so it will be interesting to see whether the NZD strength can be enough to push the pair further north. I would personally be hesitant to back against the USD thanks to Warsh's consistent hawkishness, so depending on how the Iran situation develops, this could turn into a reasonable short trade on this pair.
The CHF was an interesting currency yesterday. After a poor day on Monday and on a risk-on day yesterday, you would expect to see CHF falling, but instead, it rose against the USD, EUR, and GBP. One potential theory for this is that yesterday was not completely a risk-on day. In the US, we were seeing optimism that rate hikes may not be as extreme, but in Europe, the uncertainty around the Middle East continues to grow. I have a suspicion that yesterday we may have seen the safe-haven bids move from USD to CHF, away from the equally energy-reliant EUR and GBP. It may have been that European money was deciding to look for a safe haven closer to home amidst geopolitical uncertainty. Long term, the CHF looks weak as the SNB is still sitting at 0.00% interest rates, but in the short term, we may see some further moves into the CHF should tensions escalate further.
Indices
Markets closed higher yesterday, but not by a huge amount. The Dow was up 0.15%, the S&P up 0.45%, and the Nasdaq up 1.2%, as chips rallied on the positive CPI data. There were two key notes on the day, however, that shaped what looked like a dovish day overall.
Firstly, we saw positive earnings releases from big banks, with Goldman Sachs jumping 8% on its release, and JPMorgan, Bank of America & Citi all also performing well. This plays into the thesis that traditional value stocks are performing well and the value trade is real.
Additionally, IBM had a nightmare day and fell by 24% after they warned that "enterprise clients are shifting spending away from software and mainframes toward AI infrastructure". This is concrete proof that the AI capex boom will have a material impact on other large stocks and could be taking significant corporate victims. The market is moving overall towards AI, and company values will be fundamentally altered by the way people are investing their resources more and more into AI tools.
This does not mean that AI stocks are not overvalued, which they most likely are. This is proof that the AI industry is a genuine disruptor to the old way of working, and that it will have a lasting impact on everyday life. AI is here to stay; the question for the market now is how to correctly price AI stocks.
Precious Metals
Metals received the news they were craving with dovish CPI prints, which show them a light at the end of the rate-hike cycle tunnel. However, this was swiftly closed by Warsh's comments and the fact that a rate hike is still likely in September. Metals will also be looking forward to the next CPI print and how currently elevated oil will affect this next release. As mentioned yesterday, even with a dovish print, there is still concern about future inflation and future rate hikes, which were enough to dampen demand on what should have been a bumper day.
Gold rose 1.28% on the day to $4,050 and is back above the key $4,000 level, but did not even wipe out the losses it made the day before, with the case the same for silver, where it only rose by 1.88% to $58.70. Metals have not seen any safe-haven bid and are now completely at the mercy of US rate hikes, and will continue to be under pressure until the FOMC indicates it is close to being in a position to cut. I would argue such a weak response yesterday from such a positive CPI print can only be bad news in the short term for metals.
Today's Key Drivers
US PPI Data, 1:30pm UK time - The second in this week's inflation readings, this one may have less of an impact than yesterday's CPI, but a surprise will nonetheless move markets. PPI tends to be more forward-looking, so it could give us more of a guide as to what to expect for next month, but it will still not include the recent oil price rises, so its forward guidance will be limited.
Warsh, Day 2 - Today Warsh will sit down in front of the Senate Banking Committee. I would expect more of the same, but it will be well worth keeping on top of the comments in case there is anything new.
Morgan Stanley & Bank Of New York Earnings - Earnings season continues. These will give us another guide as to how value stocks are performing.
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