Market Overview

15 September 2023

The Resulting Force of Divergent Factors After U.S. CPI

Major stock indices on both sides of the Atlantic were mostly reluctant to the latest U.S. consumer inflation data for August. Even though many in the expert community hoped that it would give a clue to interest rate projections following the Federal Reserve's (Fed) meeting on September 20, the investing crowd hardly thinks so. FedWatch tool still shows only 55% to 60% betting on the Fed's holding longer pause at least until the end of 2023, while 37% to 40% expecting another small 0.25% rate hike in November or December, with 5% being ready for those hawkish moves even twice in a row.

Inflation data came out mixed, as its core reading, which strips out volatile items like food and fuel, are at 4.3% YoY, down from 4.7% YoY in July. Fed's chair Jerome Powell and his colleagues have been talking a lot lately about the principal importance of underlying inflation, which is usually related to core numbers, as they are more intrinsic to the national economy. At the same time, it is the headline CPI (consumer price index) which looks disturbing, with its annual level climbing to 3.7% YoY compared to 3.2% YoY a month ago, including a pure contribution of 0.6% MoM in August, probably due to increasingly expensive fuel. Oil exporting countries insisted on keeping their production cuts, so that Brent futures reached the levels above $93/barrel this week. The energy segment of stock markets accelerated its growth too.

A stopover to look around is the most likely outcome of the Fed's discussion next Wednesday, yet another spike in borrowing costs would be on the table later. The U.S. bond market waved a small flag suggesting the stocks may turn more bullish, according to a note from Bank of America (BofA). It pointed to the Corporate High Yield Average option spread hitting a new year-to-date low, which may be a sign that investors felt more comfortable buying risky debts. BofA analysts feel this situation as a calming or leading indicator for the stock market, as bond investors are "typically the first in the market to panic about some type of macro event that could lead to pain for equities", demanding higher yields for bonds they choose.

This allowed the BofA to raise its estimates for possible new annual highs on the S&P 500. "It would not surprise us to see investors put cash to work", Stephen Suttmeier, chief equity technician at BofA Securities said, adding that a "mountain of money" in the form of $5.62 trillion in money market funds could "help fuel" a rally when stocks investors are weighing their "risk-free return of just 5% versus the S&P 500's... return of nearly 17%" since the beginning of the year so far. This kind of estimate has been shared a day before the latest inflation report, while many other investment banks, including Morgan Stanley (MS), adhere to a rather negative outlook for Wall Street indexes.

Specific corporate stories, such as Apple's stock squat after the long-awaited presentation of the iPhone 15 line-up or the impressive comeback of Tesla share price in response to the increase in sales of its electric vehicles in China, with the revision of its rating positioning by some financial institutions may move the overall market sentiment up and down. Beside, Oracle (ORCL) shares plunged by double digit numbers after the world's second largest software distributor shared a worsening forward guidance. Ford (F) stock went up after revealing plans to double production of hybrid F-150 pickup trucks in 2024, as more consumers may feel a rising potential of gas-electric powertrains, and this way the company is hedging against uncertainty around all-electric trucks. Yet, the net force from various fundamentals looks neutral in September.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade. Indiscriminate reliance on illustrative or informational materials may lead to losses.

Lysakov Sergey
Market Focus
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