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Surging Inflation Erodes Sentiment | Morning Express 9/20/2022

Posted: Sept. 20, 2022, 12:58 p.m.

E-mini S&P (December) / NQ (December)

S&P, yesterday’s close: Settled at 3917.25, up 27.25

NQ, yesterday’s close: Settled at 12,024.00, up 90.50

Fundamentals: The central bank extravaganza is underway. Riksbank, Sweden’s central bank, surprised markets with a full 100bps hike. Coupled with much hotter than expected German PPI (+7.9% MoM vs +1.6% exp), the one-two punch quickly eroded an improving risk-sentiment on the European open. Also, last night, Japan’s CPI hit an eight year high. Shorts began covering late in yesterday’s session, driving the S&P to an overnight high of 3936.25. The news sparked a fresh wave of selling, bringing price action back below 3900 ahead of the opening bell. The hotter than expected inflation data has sent global bond markets sharply lower with the German 2-year and 10-year yields each adding about 12bps. The U.S. 10-year yield is now decisively out above 3.5% and trading at the highest since April 2011. However, the bigger story is the U.S. 2-year yield closing in on 4.0% and the 2s10s spread at the historic floor of -0.50%.

This leads into tomorrow’s Fed decision. The bank begins their two-day policy meeting today and concludes with a rate hike decision at 1:00 pm CT. tomorrow. The CME FedWatch Tool points to a 75bp hike with an 82% probability, but we believe it is more about the holistic picture. At least, what are the rate expectations after the next three meetings? The Fed is expected to hike by 200bps through yearend (between tomorrow, November, and December) with a 56.5%. This indicates the Fed would have to hike by 75bps tomorrow and another 125bps between November and December. It is our belief that risk-sentiment is teetering on this 56.5%. If 125bps at the next two meetings becomes more probable or if odds of 150bps emerges more firmly than the current 8.6%, it is likely stocks are lower. However, if these expectations fall back to 100bps, then risks for a stock market rally are becoming very skewed to the upside.

Do not miss our daily Midday Market Minute, from yesterday.

Building Permits data missed expectations, falling -10% Mom, whereas Housing Starts topped expectations, rebounded 12.2% MoM. On the inflation front, a slate off CPI from Canada came in under expectations. We now look to comments from ECB President Lagarde at noon CT, along with the U.S. Treasury auctioning $12 billion worth of 20-year Bonds.

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NQ (December)

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Crude Oil (November)

Yesterday’s close: Settled at 85.36, up 0.60

Fundamentals: Crude Oil rebounded strongly from to settle 4.4% from yesterday’s low of 81.73. We found several major catalysts driving the move; data showing +3.583 mbpd overcompliance from OPEC+ in August, a weakening U.S. Dollar on the session, the planned reopening of China’s Chengdu with 21 million residents, positioning dynamics due to the October contract expiration, and hold of rare major four-star support at 81.66-81.94. We also believe an improvement in broad risk-sentiment added tailwinds, but its arguable Crude started such a rebound in sentiment. However, the risk-environment has deteriorated into the onset of U.S. hours due to Germany’s hot PPI at +7.9% MoM. Adding to pressures in Crude Oil are reports the White House will extend the timeline of SPR release, selling another 10 mbs in November. At the end of the day, lower technical highs have been a self-fulfilling prophecy for recent action.

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Gold (December) / Silver (December)

Gold, yesterday’s close:   Settled at 1678.2, down 5.3

Silver, yesterday’s closeSettled 19.358, up 0.023

Fundamentals: Gold and Silver are on their backfoot this morning with a resurgence in the U.S. Dollar on the heels of hotter than expected German PPI (+7.9% MoM). This hot inflation read paves the way for the idea Europe will have to tighten policy much more than expected and thus erode the growth outlook further. This has also opened a trap door in the sovereign debt complex, underpinning higher yields from Germany and the U.S. The ongoing and underlying strength in the U.S. Dollar has been a crucial component of our more recent cautiously Bearish Bias of Gold.

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Silver (December)

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