Inflation! Reflation.

Originally published by AxiTrader

Quick Recap

Risk appetite is rising buoyed by solid earnings reports in the US and a little lift in global inflation. It’s a rare bird in my career that markets have cheered rising inflation but this lift will be welcome in central bank, governmental, and corporate head quarters all over the globe. Now to try to sustain the lift.

Speaking of lifts, oil prices rallied after API inventory data showed a big draw for stocks.

What You Need To Know

International

• At the close US stocks were higher as earnings continue to beat. The Dow Jones Industrial Average is up 0.42%, the Nasdaq 100 0.8%, and the S&P 500 is up 0.62%. That's off the highs but still a positive night and one which followed the move from European stocks.

• Inflation folks. It’s low but it’s coming back a little as the US and UK inflation prints overnight showed that in the US in particular CPI is back near a 2 year high with the year on year rate rising to 1.5% against 1.1% last. Month on month inflation was up 0.3% but core inflation dipped 0.1% to 2.2% year on year after price only rose 0.1% mom not the 0.3% the market expected. Here’s the US year on year rate over the past 2 years from Trading Economics.

• Looking at the UK inflation and Mark Carney’s desire to ignore inflation and concentrate on growth as he battles the expected impact of Brexit may be tested as inflation is on the rise. Last night’s September data showed inflation accelerated to 1% from 0.6% last and a little above the 0.9% the market expected.

• This increase in inflation is exactly what central banks around the world want, and need. Certainly as the Chinese data showed last week global inflation remains low. But it is lifting which gives central banks room to talk positively and crucially as RBA governor Lowe said yesterday observed inflation is important for inflation expectations which in turn drive behaviours. So up to a point – somewhere between 2-3% perhaps – rising inflation and inflation expectations is a virtuous circle for the global economy.
  

• On earnings Blackrock (NYSE:BLK), John son and Johnson, Dominos and almost every other company reporting last night beat on EPS but Goldman absolutely crushed it as the bond market ructions helped drive trading revenue.

• US Treasuries, and bonds globally, are a little lower this morning and below the week’s highs. US 10’s are down 2 points to 1.75%, the UK 10’s are off 4 at 1.08% and German 10-year bunds are sitting at 0.035%.

• Now all eyes are on China – here is the calendar for today.

Australia

• It was a better day for the S&P/ASX 200 yesterday with a 22 point rally lead by the banks and BHP. The Utility sector was actually the individually best performer on the day up 1.16% with health care, basic materials, and financials all either side of a 0.6% gain.

• That strength is likely to be replicated when trade opens this morning with the SPI 200 December contract pointing to a 13 point rally at 5am this morning.

• Yesterday’s first speech by RBA governor Lowe was extremely even handed. He’s a man who appears happy with the current settings of the Australian dollar and interest rates. He’s fairly happy with the jobs market noting its tight in terms of the unemployment rate but that is mitigated by overall under employment in the economy.

• On inflation Lowe highlighted the flexibility the RBA grants itself and also the importance of inflation expectations. He didn’t sound like he is in a hurry to ease but he did highlight that next week’s CPI is important in setting the scene for inflation expectations which in turn will inform his view of whether rates need to be cut. If the CPI however follows the lead of the UK and US data cuts will be off the table. Even a low number would have to be unexpectedly low to see the RBA rush to cut next month. More likely they would then look at the impact of observed inflation on expected inflation.

Forex

• US inflation was higher but the US dollar is largely unchanged. Euro is off its 1.1026 high and back at 1.0983 though. USD/JPY sits at 103.88 as dollar yen continues to struggle below the recent highs. I’m actually surprised that the US dollar isn’t stronger this morning given the fundamentals exhibited in the data overnight and what it suggests for the Fed. But it seems traders took a little profit on USD longs. That is something the technical certainly support – as I highlighted yesterday. Now for the question of the depth of the pullback.

• But Sterling has ripped higher after the release of inflation data, seeming confirmation from the lawyer said it is likely the British parliament will indeed have to ratify the Brexit deal the government eventually does. Throw in the technical outlook – my system – for Sterling and we have it up 0.9% to 1.2293. As ridiculous as it may sound fundamentally and with all the turmoil I’ve got a target of 1.2550/70 at the moment on a small long.

• The NZD/USD is ripping again after Q3 CPI in NZ was higher than expected. Last night’s dairy auction was also important in helping keep the NZD bid. It’s up a little less than a per cent at 0.7196 this morning. 0.7220/25 is the short term level to watch in the Kiwi.

• The AUD/USD has ripped higher as well and made an overnight high of 0.7689 – just below the important 77 cent region where the supply zone and major resistance lies – but it’s back a little at 0.7660. Besides the natural positives accruing to the Kiwi both the Aussie and Kiwi have not been hurt by the lift in mood in equity markets and the slight dip in bond rates this week. Today’s release of Chinese GDP, retail sales, industrial production, and urban investment will be important for both pairs today.

Commodities

• Oil is a little higher this morning with Crude Oil at $50.32 and Brent Oil at $51.69. Overnight in Russia the OPEC secretary general said he thinks the production deal will get done. He told reporters “We expect that all the building blocks will be in place in a timely fashion for the implementation…I am optimistic we will have a decision” Mohammed Barkindo said.

• In a quiet night’s trade that helped lift prices and traders are now waiting for the release of API inventory data. On that front analysts at Bernstein Energy said global oil inventories rose just 17 million barrels to 5.618 billion barrels in the third quarter, the smallest build since the fourth quarter of 2015 Reuters reported.

• My system still has me short and my target has risen essentially to market which is somewhat uncomfortable. But I remains short below recent highs (plus a margin). Here’s the chart.

• Gold is at $1262 and technically still looks like it is on track for a test toward the $1274/5 region I’ve been talking about in my morning videos. It’s just a technical target but gold is also aided by the stall in the US dollar rally.

• Copper is going to be interesting today given the release of the Chinese data dump. At $2.09 its siting right on support.

Today's key data and events (all times AEDT)

• Australia - Mid-Year Economic and Fiscal Outlook (11.30am)
• New Zealand - Nil
• China - Retail Sales (YoY) (Sep), Industrial Production (YoY) (Sep), NBS Press Conference, Urban investment (YTD) (YoY) (Sep), Gross Domestic Product (YoY) (Q3), Gross Domestic Product (QoQ) (Q3) (1pm)
• Japan - Nil
• Germany - Nil
• EU - Nil
• UK - Average Earnings excluding Bonus (3Mo/Yr) (Aug), Average Earnings including Bonus (3Mo/Yr) (Aug), ILO Unemployment Rate (3M) (Aug), Claimant Count Rate (Sep), Claimant Count Change (Sep) (7.30pm)
• Canada - Bank of Canada Monetary Policy Report, BOC Rate Statement, BoC Interest Rate Decision (1am)
• US - MBA Mortgage Applications (Oct 21) (10pm); Building Permits (MoM) (Sep), Housing Starts (MoM) (Sep), Building Permits Change (Sep), Housing Starts Change (Sep) (11.30pm); EIA Crude Oil Stocks change (Oct 14) (1.30am); Fed's Beige Book (5am)

Have a great day's trading