Nasdaq tumbles, Oil hits new highs

Nasdaq fell 0.6%, continuing a 3-week decline. Oil continues to rise, and it hit an 18-month high today, as did 10 year bond yields. Factory gate inflation rose more than expected in July, but the core Producer Price Index (PPI), ex volatile food and energy sectors, was flat in July. Yesterday’s ‘good’ consumer price data did not reflect July’s hike in oil prices, which are coming, but today’s PPI numbers did.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Factory gate prices hotter than expected

• Headline PPI rose 0.8% year-on-year in July, ahead of expectations, and up from 0.1% in June
• Headline PPI was up 0.3% month-on-month in July, as expected, up from 0.1% last month
• Core PPI, ex food and energy, rose 1.9% year-on-year in July, below an expected 2.3%, and down from 2.4% in June
• Core PPI number was month-on-month in July, below the expected 0.2% gain, and a 0.1% last month

Consumer sentiment index for August unchanged

• The Michigan Consumer Sentiment Index edged down from 71.6 in July to 71.2 in the first two weeks of August, above the expected 71 preliminary estimates, and is still 22% higher than a year ago
• There was more good news for the economy, and maybe a warning for the Fed, with the index for current economic condition up from 77.4 from 76.6, above an expected 76.9
• The index of consumer expectations fell to from 68.5 to 67.3 from 86.5, below an expected 68.1
• Consumer inflation expectations fell to 3.3% from 3.4%, continued softening in short-term inflation fears, while long-term inflation expectations are stuck at 2.9%

Consumer price inflation (CPI) remains sticky

The Fed closely monitors CPI inflation, which still reflects sticky inflation in the service sector due to wage inflation. However, CPI inflation is also susceptible to commodity inflation. Crude oil and food-based commodity prices are both pushing higher, given their own supply and demand dynamics, and remain inflation risks.

We’re a long way from getting back down to the Fed’s 2% target. Keep in mind that the Fed said it was targeting a “long-time average of 2%,” so it can always say that it’s getting close due to the years that we were below it, but we’re not close to that point yet. Expect interest rates to stay “higher for longer” with sticky inflation.

China’s low birth rate adds to economic woes

China’s severely low birth rate has once again become a headline in that country. A Chinese academician warned that the number of babies born in China this year may fall to between seven to nine million. That’s more than a 40% drop in the number of babies born over the past five years. China’s population is a key problem that undermines the country's growth potential, but more significantly, it’s relevance economically and militarily. Chinese authorities ramped up supporting measures to boost women’s fertility this year, but they have not yet found an effective way to stimulate population growth in China.

As a result, this is not only a permanent drag on China’s economy but also sets a strong bearish bias for China’s short-term stimulus in household spending, including properties, while also having longer-term implications for commodity demand in China. Politically and economically, it suggests that China’s survival hinges on its ability to expand its borders. Not good for global peace and stable markets.

TODAY’S MAJOR MARKETS

Equity markets sell off again

• Equity markets sold off in morning trade, with the Nasdaq down 0.6%, the S&P 500 down 0.2% and the Russell 2000 was off 0.6%
• Global markets were generally down, with the FTSE 100 and DAX off 1.2% and 1.0%, respectively, while the Nikkei 225 was up 0.8%
• The VIX, Wall Street’s fear index, fell to 17.4, well off last week’s high of 20.5

Bonds sell off, dollar up

• The dollar index was up 0.4% against a basket of currencies to 102.9
• The Euro and Yen were down 0.3% and 0.2% against the dollar, respectively, while Sterling was up 0.2%
• Bonds sold off, with 2-year and 10-year Treasuries yields rising to 4.89% and 4.16%, both year-to-date highs

Commodities see oil rebound to new high

• Gold and Silver prices fell by 0.2% and 0.6%, respectively, at $1,946 per ounce and $22.7 per ounce
• Crude oil prices rebounded 1.0% to $83.6 per barrel, a an 18-month high
• Grain and oilseed market react to today's USDA crop report, in which it reduced corn yield estimate to 175.1 bushels per acre (bpa), with the soybean yield cut to 50.9 bpa
• USDA also reduced both old- and new-crop corn exports, new-crop feed usage and new-crop soybean exports

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com