Originally published by Rivkin
U.S. equity markets rallied following better than expected earnings reports on Tuesday while bond yields fell with the U.S. dollar following a slight drop in core CPI data. Year-on-year for September headline CPI increased to +1.5% from +1.1% in line with expectations, however the core measure excluding volatile items such as food and energy declined from +2.3% to +2.2% missing forecasts of 2.3%. Both the yield on two & ten-year government debt declined -2 basis points to +0.8026% & +1.7432% respectively. While the U.S. dollar declined against most major peers the dollar index ended trading unchanged due to a +0.21% gain against the EUR/USD which is the largest contributor to the index calculation.
While the CPI measure receives more attention given it is used as the reference rate for some financial contracts, adjusting benefits and tax brackets the Fed actually uses the personal consumption expenditures price index (PCE) as its preferred measure of inflation. There are a few key differences between the two measures, CPI for example only measures out of pocket expenses that consumer purchase excluding items or benefits that are paid for by others such as an employer or the government which are including in PCE. CPI also uses fixed weights that are updated every two years while PCE adjusts for changes in prices as consumer substitute more expensive goods for cheaper ones.
Currently core PCE year-on-year for August is at +1.7%, just below the Fed’s 2% target while the next reading of PCE inflation will be released on October 31st.
Both the S&P 500 & Nasdaq 100 were +0.62% & +0.91% higher respectively with all ten sectors of the S&P500 finishing positive for the session led by gains in healthcare (+1.06%), technology (+1.03%) and basic materials (+1.01%). A few big names reported Q3 earnings on Tuesday with Goldman Sachs Group Inc (NYSE:GS). gaining +2.15% after reporting a huge jump of 58% in profit for the third-quarter as bond trading revenue rebounded with earnings per share up to US$4.88 from US$2.90 previously and estimates for US$3.82, although a share buyback did contribute towards this increase.
Yahoo (NASDAQ:YHOO) Inc. gained +1.4% in after-hours trading as revenue for the third-quarter increase +6.5% to US$1.31 billion surpassing estimates of US$1.30 billion. Excluding items earnings per share was US$0.20 beating the US$0.14 anticipated. Intel Corp (NASDAQ:INTC). also beat analyst estimates reporting a +9.1% increase in third-quarter revenue while earnings per share excluding extraordinary items was US$0.80 with estimates for only US$0.73. Despite this the shares were -3.50% lower in after-hours trading as the company forecast fourth-quarter revenue to be US$15.7 billion which was lower than the market expectations of US$15.86 billion.
In the U.K. inflation data was higher than forecast, the headline CPI figures up +1.0% year-on-year for September from +0.6% previously and estimates for a +0.9% gain. The core measure for the same period was also higher than forecast, gaining +1.5% from +1.3% with expectations for +1.4%. In response the Pound gained +0.89% against the U.S. dollar and +1.14% stronger against the Euro. The yield on two-year government debt was unchanged at +0.207% while the yield on ten-year debt which is more sensitive to inflation and interest rate expectations declined -4 basis points to +1.083%.
This seems counter intuitive given you would expect yields to rise with inflation and while it is hard to pinpoint the exact reason, there a few possibilities behind this including that yields have more than doubled since August up from just +0.5% making them attractive for investors searching for yield. At the same time the Bank of England still looks set to cut rates before the end of year with Governor Mark Carney has stated he is willing to look through higher inflation in the near-term in order to safe guard the economy over any fallout from the Brexit.
The weaker U.S. dollar helped boost commodity prices as measured by the Thomson Reuters CRB index which gained +0.2% on Tuesday. Oil prices gained with both Crude Oil & Brent crude +0.8% & +0.47% higher respectively, natural gas gained +0.52% while copper declined -0.07%. Precious metals spot gold & Silver were also +0.51% & +1.08% higher respectively.
Locally RBA Governor Philip Lowe gave a speech which highlighted a “wait and see” approach as he noted there were risks in attempting to achieve inflation too quickly referring to the health of balance sheets and the danger of unsustainable increases in leverage. At the same time though he left the door open to lower rates in necessary stating that a deterioration in the labour market could prompt action.
This will prompt many to consider whether or not we will see any further stimulus from the RBA, at the moment they are likely to remain in a “wait and see” mode as two cuts earlier this year continue to work their way into the system. There is certainly still scope to lower rates potentially in 2017 with wage growth remaining weak while an increase in unemployment highlights that the headline employment figures are not as strong as they might suggest. The RBA will remain data dependent and assess the incoming data, with the focus now turning to unemployment data on Thursday followed by the quarter inflation figures next week.
The AUD/USD was +0.56% higher against the U.S. dollar on Tuesday and the ASX200 was also +0.41% higher. The market also looks set to continue these gains this morning with ASX SPI200 futures up a further 13 points in overnight trading.
Data releases:
- Australian Westpac Leading Index (MoM Sep) 10:30am AEDT
- Chinese Industrial Production, Retail Sales and Fixed Asset Investment (YoY Sep) 1:00pm AEDT
- Chinese GDP (YoY & QoQ Q3) 1:00pm AEDT
- U.K. Unemployment (3 Month Aug) 7:30pm AEDT
- U.S. Housing Starts & Building Permits (MoM Sep) 11:30pm AEDT
- Bank of Canada Rate Decision (Oct 19) 1:00am AEDT
- U.S. Crude Oil Inventories (Oct 14) 1:30am AEDT
- Fed Beige Book 5:00am AEDT
This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd.
