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Stocks Firmer, Yields Down

 

Corporate Tax Pressure? 

If you have a whopping and growing budget deficit, rising rates making it more expensive to service the debt, and the opening of a major broad, horizontal proxy conflict, you are going to need to squeeze people for more tax. There is no alternative. So, why not corporates? Microsoft has received a $29bn demand for back taxes from the IRS. Am no tax expert, but I’d expect the US and other governments to be pressing harder for their ‘fair share’ of taxes from companies that seem to be able to do what they want.   

IPOs, Luxury and Bonds 

Birkenstock flipped and flopped. Investors took a bit of a bath on this one with the stock sliding 12% from its IPO price. To be fair the market for new IPOs has not been tremendous and it had LVMH out in the morning with downbeat earnings hitting luxury stocks in Europe, so it wasn’t the most auspicious beginning. 

Bond yields are generally lower, stocks broadly firmer ahead of key US inflation data today and with producer price inflation and Fed meeting minutes in the rearview mirror. Major European indices trade broadly higher in early trading, with London, Paris and Frankfurt each about half a percent higher after drifting on Wednesday. The S&P 500 added another 0.4% to 4,376 and the Nasdaq rose 0.7%, whilst the Russell 2k lost 0.2%. 

  

Yields Drop, Oil Surges, PPI Rises 

The 10yr Treasury yield fell further to a three-week low just below 4.54%, while the yield on the 10yr gilt dropped to just 4.3%. Oil dropped yesterday as API data showed a bumper 13m build in US crude stockpiles, whilst gasoline inventories rose 3.6m barrels, though crude prices have bounced a bit this morning. Gold keeps breaking higher as real rates fell further with 10yr TIPS back to 2.248%.  

PPI rose more than expected at +0.5% for the month, against the estimate for a 0.3% rise, the Labor Department reported Wednesday. annually the PPI rose at 2.2% vs 1.6% expected, the biggest jump since April. Excluding food and energy, core PPI was up 0.3%, versus the forecast for 0.2%.   

  

Mixed FOMC 

FOMC minutes showed "several participants" felt that "the focus of monetary policy decisions and communications should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels." You could not a more categorical endorsement of the narrative pervading the market that what matters is not how high but how long.  

And yet, they still think one more: “A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted.”  

Federal governor Waller said the central bank had reached a kind of "watch and see" point thanks to higher rates. He’s a hawk so this is indicative of the minutes – the FOMC was getting more cautious even ahead of the recent spike in yields. San Francisco Fed president Daly said the neutral rate of interest may be higher than pre-pandemic, and that the rise in market bond yields may substitute a hike.  

 

US CPI Today 

Could be hotter than expected, offering support to Treasury yields and the dollar. The warm PPI read could see more like +0.4% MoM for core CPI today vs the +0.3% expected. Also watch weekly unemployment claims data, fc 211k. Meanwhile the UK economy grew in August by 0.2%, whilst the RICS house price balance fell further against expectations of an improvement, to lowest levels since February 2009. 

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