16th July - More Soft Inflation But Still No Move
- 1 day ago
- 5 min read
Yesterday saw the second set of inflation figures due to be released this week, with the US PPI data. The PPI y/y came in at 5.5% against an expected 6.2%, PPI m/m was -0.3% against an expected 0.0%, Core PPI y/y was 4.7% against an expected 5.1%, and Core PPI m/m was 0.2% against an expected 0.3%. Once again, we saw lower than expected figures across the board, but as we will dive into, markets did not move much.
This is in large part due to the geopolitics around Iran, where the US conducted a fifth day of strikes and continued its blockade of Iranian ports. However, we also saw reports that Trump is considering escalating further, even possibly seizing the strategically key Kharg Island (the site of Iran's main oil export terminal). Trump had yesterday threatened to bomb energy infrastructure and bridges, so the rhetoric seems to be escalating, not calming. We also see the OFAC wind-down deadline for purchasing Iranian oil is tomorrow, meaning there is a real risk we see a continuation of the energy price shock over the next few weeks. Oil rose yesterday, but not to the extent of previous days this week, with Brent up just 0.25% and US Oil up 0.64%. Brent is currently sitting at $83.50 per barrel, up from the pre-war price of $73 but still well below the wartime high of $113.
Elevated oil prices are the catalyst that is muting the market's response to the CPI prints, as we mentioned was likely before we saw the data. Even though we have seen soft prints, this data was for June when oil prices were at their lowest and before the recent price rises, they are capturing a picture of a world that no longer exists. Markets are therefore looking forward to next month's figures and expecting higher inflation again, which, coupled with FOMC Chair Warsh's hawkish comments, means markets are still expecting rate hikes later in the year. This has meant there is not the optimism we would otherwise have seen from such dovish inflation prints; we are still some way away from the end of the US rate-hike cycle.
Forex
The USD did see a fall on the day after the PPI news, but not as significant as we may have otherwise expected. The DXY fell below the 100.650 line that had been providing recent support. The price action today will be interesting to see if this is maintained or if prices move back north above this area. There are no new data releases this week, so the market now has some time to properly digest the inflation figures, meaning the price action over the next few days could be highly informative as to the direction of travel in advance of next month's inflation figures.
Yesterday was a very positive day for the GBP, as it jumped against all other currencies on the day, hitting a one-year high against the EUR. This was in large part thanks to reports emerging from the UK that PM-designate Andy Burnham has settled on Shabana Mahmood as Chancellor, the PM's right-hand man in government and the person in control of the country's purse strings. Markets took this very positively, seeing her as a pragmatic, fiscally disciplined, market-friendly choice who'd work alongside the BoE on financial stability. The GBP was already gaining support from the expected smooth political handover from Keir Starmer to Burnham; this news just gave the move more fuel. In terms of trading the GBP, should we see a pullback from the highs yesterday as markets catch their breath, we could then see further strength in the GBP, and this could be a currency to back over the coming weeks and months.
Outside of the USD and GBP, the NZD and AUD continued to see gains, with the NZD again being a very strong performer. The CAD continued to see backing from rising oil prices, though that has slowed as oil price increases have slowed. The CHF and JPY continued to have mixed days, as a combination of rate differential pressures and safe-haven demand continues to push both currencies on different days.
Indices
Yesterday was another complicated day for indices, despite what should have been the good news of lower PPI prints. The Dow closed 0.2% up at 52,650, the S&P was up 0.33% to close at 7,570, and the Nasdaq rose 0.35% to close at 26,100. The biggest winners of the day were the mega-cap stocks in the Mag-7 (Apple +4% to a fresh all-time high, Amazon +3%, Alphabet +3%, Microsoft +3%), while semiconductors fell. This is an interesting change from the growth-to-value concept we had been seeing play out over the past few weeks, as yesterday capital moved from the semiconductor stocks into larger and so potentially 'safer' mega tech stocks. This churning within tech muddies the water a little for the growth-to-value rotation, so the next few days and weeks will be interesting to see if this is a one-session move or a larger trend. Could the Mag-7 now be starting to be considered as the safe bet, too big to fail, reliable homes for investment?
The Nasdaq is still sitting in a clean wedge pattern, seemingly with liquidity building up on both sides. If we continue to see escalation in the Middle East, I would not be surprised at all to see some form of news catalyst (whether it is positive or negative) cause this market to explode in one direction or the other. At this stage, though, it is too early to tell which way that will be.
Precious Metals
The tale of the week for precious metals is that inflation releases gave them exactly what they needed to gain support, but they still did not gain support. A combination of escalating tension and uncertainty in geopolitics coupled with lower inflation figures should, in theory, have led to a huge amount of support for the safe-haven metals. Instead, so far this week - Gold has dropped 1.53% to $4,030 and just above the key $4,000 level, whilst Silver fell 3.73% to $57.
This is all the proof we could need that, at this time in their cycles, metals are completely and utterly dependent on interest rates. Despite news that would help them normally, the hawkish comments from Warsh to Senate and Congress and the still more-likely-than-not rate hike in September have meant metals are still under enormous pressure. It seems likely that we will not see a recovery in prices in the near future until there is evidence that the rate hike cycle is either likely to end soon or we see some catalyst that drops oil prices quickly. If we are trading metals, the best bet is to risk low on short trades and wait until momentum starts to shift.
Today's Market Drivers
UK GDP m/m, 7:00 am UK time - The only news release of the day, this will either add fuel to GBP strength or temper optimism slightly. Either way, it should be consequential for GBP in the medium term.
CPI & PPI Fallout - Today we are likely to see the markets fully digest the news released this week. We may begin to see the trends that will last for the next few weeks begin over the next 48 hours as investors settle on a post-CPI strategy.
Iran - As always, unexpected developments from the Middle East will affect all markets.
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