Risk on to start the week as inflation looms

Morning Note

Stocks are trading a tad firmer in the early part of the session, after a toughish week. US indices fell for a fifth straight day on Friday, weighed down by Apple’s setback, the stock falling over 3% after a court dealt a big blow to its app store payment model. Tesla shares fell 2.5% after Cathie Wood’s Ark group sold down its holdings. More than a whiff of mega cap tech/growth fading – question is whether we get the rotation into cyclicals to keep the market grinding higher. Dip buyers failed to come in last week so looking perhaps to see whether there are further losses to come. Futures are this morning trading in the green. Meanwhile inflation is still a problem, with US producer prices rising 8.3%. China’s regulatory crackdown on big tech continues, with Beijing planning to break up Ant’s mobile platform Alipay, sending Alibaba shares down 5% in Hong Kong and the broader Hang Seng down by 2%. 

 

Nevertheless, there is a mild risk-on feel to the start of the new trading week. The FTSE 100 is up half of one percent after it tested the 7,000 support last week, which has held for now. The index is slap in the middle of the range it’s treaded since April, failing to break out in any meaningful way. Utilities, energy and financials doing the lifting this morning, with Royal Mail and National Grid at the top of the leader board. ABF fell to the bottom despite raising its profit target for the year on improved margins as supply chain problems hurt sales. SThree shares jumped another 6% after it also said profits would be ahead of expectations – staffing shortages playing into the hands of recruiters.

Inflation ahead

Stagflation: The US PPI reading for August was hot, with prices up 0.7% month-on-month and sending the annual increase to 8.3%, the biggest since records began in 2010. Whilst some may argue that this is transitory, and due to supply chain bottleneck, shortage of vessels etc etc, and therefore ‘nothing the Fed can do about it’, you have to ask yourself whether expansionary monetary policy is actually doing more harm than good right now.

 

Light day for data so all eyes on the US consumer price index tomorrow. The key inflation reading for the month of August is set to come in at 5.3%, according to consensus. In July, inflation steadied at 1 13-year high of 5.4%. Core inflation rose 4.3%. But there was some moderation in the month-on-month increase, with core at +0.3% vs +0.9% in June. Vehicle prices have been one of the main drivers of the increase, but the pace of price increases slowed almost to a halt in July. A hotter-than-expected reading tomorrow could see the market adjust its view of when the Federal Reserve begins tapering asset purchases. Cooling in inflation pressures would be positive for market sentiment.

Oil prices advance

Crude oil prices are firmer with WTI (spot) nudging its head above $70 again. Supply remains affected by Hurricane Ida. OPEC is due to release its monthly outlook later today. In FX, the dollar is firmer, with the euro dropping to its weakest since the end of August. GBPUSD is just about holding on to 1.38. Hard to talk meaningfully about FX trades right now with everything so range bound and trading sideways. Elsewhere, Bitcoin is lower again around $4k and chart action looks dicey.