Russell 2000, Oil and the Dollar lead markets

The Fed will keep one eye on events and one on economic data. Recent inflation and demand data have been pretty benign despite the rising oil price. Risks of a budget fall-out and government shutdown coupled with a US auto workers strike might tend to make the Fed more dovish and not look to raise rates next week. The ECB hinted that today’s rate rise might be its last. The broad Russell 2000 index led markets higher and the Vix fear index fell to a year-to-date low. The Dollar was strong, and the Euro continued its swoon. Oil passed the $90 mark.

Bottom-line: risk-on.

TODAY’S MAJOR NEWS

Have US rates peaked with moderating inflation? 

Wall Street continues to accentuate the positive following this morning’s data dump, with signs of moderating wholesale price inflation and robust retail sales, assuming that the Federal Reserve will do the same thing. Comments that suggest European rates might have peaked, even as it raised rates for the tenth time, prompted optimism.

ECB hikes rates, but indicates it might be the peak

The European Central Bank (ECB) announced a tenth consecutive hike in its official interest rate, by 25 basis points to 4.0%. The European Union is still trying to tackle core inflation at 5.3%. However, there were signs that this might be the peak in euro rates. In an accompanying statement there was an optimistic note: “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” The Euro/Dollar fell 0.6% to $1.066, close to its year-to-date low of $1.055, anticipating lower rates to come.

Auto worker’s flash strikes if no deal on pay

United Auto Workers (UAW) will hold flash strikes in strategic plants if the Big Three automakers fail to agree on a new contract by the midnight Thursday deadline – it’s called the "stand up” strike. UAW union members would be instructed to strike suddenly at strategic, targeted auto, unless the automakers agree to new contracts. The two sides are very far apart: Ford, General Motors and Stellantis have all raised their pay raise proposals to 20%, but this is half what the unions want, in addition to pension and retiree healthcare proposals. A deal which is acceptable to the UAW would hit automaker profits, and impact wage inflation. Strikes which closed Ford, GM and Stellantis operations would hit profits (all three stocks are off around one per cent today.)

Core producer price inflation moderates

Core producer price index (PPI) numbers were below expectations. Inflation at the wholesale level appears under control, nearing the Fed’s 2% mandate. Never mind that higher energy prices eventually tend to find their way into core inflation via packaging, processing, freight, etc. For today, the news is good, and Wall Street chooses to say that the “glass is half full.”

• Headline PPI rose 1.6% year-on-year in August, ahead of an expected 1.3%, and up from 0.8% last month
• PP rose 0.7% month-on-month in August, as expected, in line with last month
• Core PPI ex food and energy rose just 2.2% year-on-year in August, a shade below 2.3% expected, and down from 2.4% last month
• Core PPI that rose just 0.2% month-on-month in August, as expected, down from an upwardly revised 0.4% in July

Retail sales point to soft landing

Wall Street saw retail sales as a solid number, even excluding vehicle and gasoline sales, suggesting the economy is experiencing a soft landing.

• Retail sales growth was 1.6% annually, ahead of expectations
• Retail sales rose 0.6% month-on-month in August, ahead of 0.2% forecast, and up from a downwardly revised 0.5% last month
• Retail sales minus vehicles also rose 0.6% month-on-month in August, beating expectations of 0.4%, lower than a downwardly revised 0.7% growth in July
• Retail sales minus vehicles and minus gas sales rose just 0.2% month-on-month in August, lower than a downwardly revised July number of 0.7%

Benefit claims point to tight labor market

There are still no signs of higher unemployment claims and the labor market remains tight. Employers are posting fewer job openings, dropping the ratio for openings to available workers below 1.5, down from the peak just below 2.0. But employers are also holding on tightly to the workers that they do have, hoping for a soft landing that would allow for growth again in this tight labor market. Furthermore, fewer workers are jumping out of jobs in the current environment. As such, wage inflation remains a problem that has not yet seen substantial relief, which continues to show up in the Fed’s super-core inflation number of services minus shelter.

• First-time claims for unemployment benefits rose to 220,000 in the week ending September 9, down slightly on 217,000 the previous week
• This reduced the four-week moving average to 224,500 claims from 229,500 the previous week
• Continuing claims totaled 1.688 million in the week ending September 2, up modestly from the previous week
• The four-week moving average also fell modestly1.697 million

China becomes world’s largest auto maker

As the US faces a labor strike by auto unions, China surpassed Japan as the world’s largest auto exporter this year, driven largely by EV sales, with more than half of those cars going to Europe. However, the European Union has opened a probe into China’s EV program, claiming that large state subsidies created unfair competition. This is indicative of the larger decoupling of the US and of Europe from dependency on Chinese products. Reuters cited a report from Rhodium Group stating that US and European firms are shifting investment away from China toward other developing markets. India is the biggest winner in this shift, followed by Mexico, Vietnam, and other South Asian countries.

TODAY’S MAJOR MARKETS

Russell 2000 leads broad equity rally

• Equity markets rallied after the PPI and retail sales prints, with the broadly-based Russell 2000 up 1.2%, the S&P 500 and Nasdaq and up 0.7% and 0.8%, respectively
• Foreign markets were stronger, with the FTSE 100 up 2.1%, the Nikkei 225 up 1.4%, and the Dax up 1.0%
• The VIX, Wall Street’s fear index, fell to 13.1, almost a year-to-date low point

Dollar strengthens

• The dollar index breached technical levels, rising 0.4% to 105.2
• Versus the dollar, the Euro and Sterling were down 0.5%, while the Yen rose 0.2%
• 2-year and 10-year bonds fell back to 4.98% and 4.27% respectively

Oil breaches $90 mark

• Crude oil prices rose 1.9% to 90.2 per barrel
• Spot gold prices were off 0.2% at $1,928 per ounce, while silver fell 1.7% to $22.8 per ounce
• Wheat prices lost upward momentum in this week's chart-related bounce, leading to some profit taking this morning
• Corn prices continue to find strength above a double-bottom on the charts
• Soybeans bounce following recent losses on ideas that supply risks remain very much alive in the Midwest

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

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