Daily Market Outlook, August 14, 2024

Munnelly’s Macro Minute…

“UK Inflation Continues to Soften, US Data On Deck Later”

Following the generally positive signals from Wall Street overnight, Asian markets are mostly up on Wednesday. Data indicating a less significant than anticipated increase in U.S. producer prices reinforced expectations of a 50 basis point interest rate drop by the US Fed in September. Later in the day, markets await the publication of the more eagerly anticipated report on US consumer price inflation for July. Currently, the FedWatch Tool from the CME Group indicates a 54.5% chance of a rate decrease of 50 basis points and a 45.5% possibility of a rate cut of 25 basis points.

The Japanese stock market was noticeably higher. Index heavyweights and financial stocks are leading the gains across most sectors as the Nikkei 225 continues to rise above the 36,400 handle. The market leader SoftBank Group is up almost 3%, while Fast Retailing, the company that runs Uniqlo, is up about 1%. Honda is up about 4% and Toyota is up nearly 4% among automakers. The announcement that Japanese Prime Minister Fumio Kishida would resign in September, capping a three-year tenure characterized by surging costs and tainted by political scandals, added to the hectic news stream across Asia. The benchmark Nikkei gave up gains to be down 0.04%, as the currency marginally rose in response to political unpredictability.

Further indications of improvement were seen in the UK's July inflation statistics, which showed prices slightly declining by -0.2% m/m and a projected increase in headline inflation somewhat less than the 2.2% y/y from 2.0% in June. While problematic services fell to 5.2% y/y from 5.7%, well below forecast and the best result since June 2022, core CPI continued to slide, slowing to 3.3% y/y from 3.5% (median 3.4%), the lowest reading since September 2021. With services prices in July contrasting favorably to both the 5.3% estimate for year-end and the 5.6% July services forecast included in the August MPR, the data offers some immediate vindication for the BoE following its rate decrease earlier in the month. The improvement was fueled by a decline in the inflation of hotels and restaurants as well as additional downward pressure from recreation. But such gains are unlikely given base effects throughout the remaining months of the year (see chart), and as Tuesday's employment and pay figures showed, there is still strong underlying demand inside an expanding economy, which poses some upside risks to the price profile. Therefore, even while this development is positive, MPC's perspective on the likelihood of more UK rate decreases should not be considerably altered by it alone.

Stateside, according to Goldman Sachs they expect a 0.16% increase in July US core CPI (vs. 0.2% consensus), corresponding to a year-over-year rate of 3.20% (vs. 3.2% consensus). SP500 implied move through today’s close is +/-1.05%, The research team's scenario analysis and market reaction are shared below.

0.07%-0.12% SPX +1.00%

0.13%-0.18% (GSe 0.16%) SPX +0.75%

0.19%-0.24% SPX +/-0.40%

0.25%-0.29% SPX -1.25%

0.30%-0.34% SPX -1.75%

>0.35% SPX -2.50%

Overnight Newswire Updates of Note

RBNZ 25bps OCR Ease To 5.25%, Inflation Target Converges
Eurozone Rate Cut Questioned As German Wages Soar
Japan PM Kishida Plans For No Re-Election In Sept Race
PM Kishida: Japan Must Promote Wage, Investment Growth
Kiwi, Aussie Falls After The Surprise Rate Cut By RBNZ
Commodities On Defensive Repositioning, Ahead Of US CPI
Asian Shares Rise, Kiwi Slumps As New Zealand Cuts Rates
US Considers Rare Antitrust Move: Breaking Up Google
Astrazeneca Vaccine Pjt Doubts, UK Treasury Seeks Aid Cut
Fitch Ratings Downgrades Ukraine To ‘RD”
US Approves $20B Israel Weapons Package
Iranian Officials: Only Gaza Ceasefire Will Delay Retaliation
Hamas: Will Not Attend New Cease-fire Talks With Israel

(Sourced from reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represents larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.1035 (EU1.57b), 1.0805 (EU815.6m), 1.0800 (EU753.1m)
USD/JPY: 146.25 ($1.16b), 150.50 ($1.05b), 157.70 ($888.3m)
USD/CAD: 1.3900 ($945.1m), 1.3700 ($504.4m), 1.3640 ($469.7m)
AUD/USD: 0.5615 (AUD660m), 0.5720 (AUD420m), 0.6670 (AUD350.3m)
USD/CNY: 7.5000 ($480.1m), 8.0000 ($454.8m), 7.2000 ($446m)
GBP/USD: 1.1055 (GBP675m), 1.2725 (GBP480.3m), 1.2800 (GBP333.6m)
USD/MXN: 18.10 ($820.8m), 17.51 ($579.4m)
EUR/GBP: 0.8755 (EU329m), 0.8515 (EU300m)
NZD/USD: 0.6090 (NZD958.1m), 0.5240 (NZD360m), 0.6000 (NZD308.5m)

CFTC Data As Of 09/8/24

Equity fund speculators trim S&P 500 CME net short position by 25,312 contracts to 222,856
Equity fund managers cut S&P 500 CME net long position by 57,309 contracts to 881,533
Swiss franc posts net short position of -22,073 contracts
British pound net long position is 74,399 contracts
Euro net long position is 33,580 contracts
Japanese yen net short position is -11,354 contracts
Bitcoin net long position is 538 contracts