Fiscal and monetary policy worlds are colliding today and that has set off a chain reaction.
The fiscal side of things stems from reports that UK Prime Minister Truss is thinking about scaling back her fiscal stimulus plan and allowing an increase in the corporate tax rate. This speculation has led to a surge in the UK gilt market and in the British pound. The 10-yr UK gilt is down 26 basis points to 4.26% and GBP/USD is up 1.0% to 1.1206.
This speculation comes with the Bank of England poised to end its emergency gilt purchase program on Friday. Nothing has been finalized in terms of the fiscal stimulus plan, but clearly, market participants liked what they were hearing.
The S&P 500 futures were up 42 points, the Nasdaq 100 futures were up 102 points, and the Dow Jones Industrial Average futures were up 340 points. Unfortunately, the futures market ran headlong into a hot Consumer Price Index (CPI) Report for September.
Currently, the S&P 500 futures are down 74 points and are trading 2.1% below fair value, the Nasdaq 100 futures are down 307 points and are trading 2.8% below fair value, and the Dow Jones Industrial Average futures are down 487 points and are trading 1.6% below fair value.
Treasuries, in turn, have given up their UK-fed gains. The 2-yr note yield, sitting at 4.29% in front of the CPI report, has soared to 4.48%, and the 10-yr note yield, sitting at 3.85% in front of the CPI report, has jumped to 4.03%.
Briefly, total CPI was up 0.4% month-over-month in September (Briefing.com consensus 0.2%) following an unrevised 0.1% increase in August. Core CPI, which excludes food and energy, jumped 0.6% month-over-month (Briefing.com consensus 0.4%) following an unrevised 0.6% increase in August.
On a year-over-year basis, total CPI was up 8.2%, versus 8.3% in August, but core CPI was up 6.6% versus 6.3% in August.
The key takeaway from the report is the recognition that core inflation has gotten worse, driven by widespread pricing pressures that included another 0.7% increase in the shelter index. This understanding will cement expectations for a 75-basis point rate hike at the next FOMC meeting and stir worries that the Fed will stay on an aggressive rate-hike path longer than hoped.
Separately, initial jobless claims for the week ending October 8 increased by 9,000 to 228,000 (Briefing.com consensus 225,000). Continuing jobless claims for the week ending October 1 increased by 3,000 to 1.368 million.
The key takeaway from the report is that initial claims are still running at relatively low levels that suggest the labor market continues to run hot — or, at least too hot for the Fed’s liking.
Now, we’ll have to see if the stock market can find a way to walk away from the post-CPI accident in better shape than it now appears to be. To be sure, it had some inkling from yesterday’s Producer Price Index that today’s report might not look so good; and the fed funds futures market had already priced in an 84.5% probability of a 75-basis point rate hike at the next meeting.
What has changed, though, is that there is a higher probability now in the fed funds futures market for a higher terminal rate of 4.75-5.00% by February. Yesterday, that probability stood at 29.7%. Today it is 67.9%.
The equity futures market right now, then, is a bit of an interest rate mess related to monetary policy considerations. That is going to spill over to the cash market, much like it has been doing all year, and it has tempered the early enthusiasm about the fiscal hope involving the UK.
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Originally Posted October 13, 2022 – September CPI report creates another interest rate mess
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