Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets in the day ahead. Today is Wednesday, Oct. 11. The Bottom Line segment of today’s podcast starts at (5:06) for listeners who want to skip ahead.
State of Play
Stocks rallied yesterday but finished off the highs as the latest round of Fed speakers repeated the mantra that interest rates may be high enough. As of 0640 we’re looking at a little bit of risk on, mostly in the bond market:
Stock index futures are pointing to gains, led by tech. The Nasdaq is up 0.3%;
Bonds continue to see bids, especially at the long end of the curve. The 30 year-yield is down 11 basis points to 4.72%. The 10-year is rallying as well, with the yield down 10bps to 4.56%. The 2-year is down 2bps to 4.96% (yields move inversely to prices).
Commodities aren’t doing much. WTI crude oil is down 0.5% to trade around $85.50/barrel. Copper is unchanged;
Cryptos are down a bit. Bitcoin is off 1% to trade around $27,200.
Known Events
MBA Mortgage Applications are out at 0700. Last week there was a 6% drop in applications as the average 30-year mortgage rose to 7.53%.
Producer prices are the main event of the day, out at 0830. This is very much a leading indicator of consumer inflation under the premise that producers pass higher costs on to consumers. Economists expect a 0.3% MoM increase to the headline PPI, a pretty significant drop from the 0.7% MoM seen in the last reading. This would leave the annualized PPI at 1.6%, same as last month.
Core PPI, which excludes food and energy, is expected to print at 0.2% MoM, the same as last month, which would push the annualized figure to 2.6% from 2.5%. As you can see Core PPI has been trending downward, with the one hiccup in July. Other than that we’ve consistently had 0.2% monthly Core PPI going back to last fall:
Then we have FOMC Meeting Minutes, out at 1400. This will shed more light on the debate, to the extent that there was any, at last month’s meeting. It’s nice to have this insight but Fed officials have likely moved on so not sure how significant this will be for markets.
The Bottom Line©️
You suddenly get the sense that fear has left the building a little bit. The situation in the Middle East remains precarious of course, but markets continue to treat it as a regional conflict that will not involve other powers — or at least not overtly. Obviously they are (have been) involved as proxies.
Other than that we have Fed officials saying the bond market has done their work for them. That was with yields quite a bit higher than they are now, so it will be interesting to see how those views age ahead of the next Fed meeting on Nov. 1. Right now futures traders are pricing in just a 15% chance of a rate hike. A lot of it will likely depend on data of course.
That’s where today’s PPI comes in. If it flashes hot then all this good cheer could be out the window. Then Fed officials will likely have to walk back their dovish talk. It’s likely (probable) the Fed got these PPI numbers ahead of time, but could they have been weeks ahead of time? That’s the kind of timeline that is necessary to write out all these speeches. Maybe they did, just because you figure the Fed isn’t dumb enough to risk getting egg on its face over this. Right?
We also have the CPI tomorrow...
Housekeeping
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Producer Prices