Good morning contrarians! It is Wednesday, Oct. 12.
Stocks finished lower yesterday with all indexes but the Dow Industrials losing ground on the day. The. Nasdaq was the worst offender, giving up more than 1%. Stocks were actually poised for a winning day until Bank of England Governor Mark Bailey said UK pensions had until Friday to finish rebalancing their positions. That led to a quick reversal into the close and here we are.
State of Play
As of 0630, it looks like risk is actually back on:
Stock futures are moving higher, led by tech, with the Nasdaq up 0.8%. S&P 500 futures are up 0.6%;
This has not translated to other asset classes however:
Bonds are roughly unchanged. The 2-year yield is down 2 basis points to 4.29%. The 10-year is flat at 3.95% (yields move inversely to prices);
Cryptos aren’t doing much. Bitcoin is up 0.5% to trade around $19,200;
Commodities are flat, with WTI crude oil changing hands around $89/barrel.
Producer Prices
The Producer Price Index has long been an afterthought to the sexier Consumer Price Index, even though the PPI is the more forward-looking indicator (seeing how producers typically end up passing higher costs on to consumers). Maybe that is about to change, with the PPI first up this month and CPI tomorrow. Usually it’s the other way around.
Look for this number at 0830. Economists surveyed expect the year-over-year PPI to increase by 8.4% in September, down a bit from the 8.7% recorded last month. The month-over-month figure is actually expected to increase by 0.2% after declining 0.1%. Core PPI, which excludes food and energy, is expected to print at 7.3% YoY, identical to its level last month.
These are gaudy numbers, but an 8.4% reading would actually be the lowest in more than a year. Not enough to get anybody to declare victory over inflation, but at least progress.
FOMC Minutes
Minutes from the last Federal Open Market Committee meeting will be published at 1400. Not entirely clear what can be gleaned from this seeing how Fed officials have been shooting their mouths off at conferences and in TV interviews for weeks since the meeting. Their message has been clear, that interest rates need to keep going up. Maybe the minutes will unveil some divisions on this? Even so, it doesn’t mean the doves will reverse course as they too have been pretty consistent with their messaging.
Earnings
Third-quarter earnings season is upon us. PepsiCo (PEP 0.00%↑) is due before the open. That’s the main one today. Tomorrow we get the likes of BlackRock (BLK 0.00%↑), Domino’s Pizza (DPZ 0.00%↑), and Walgreens Boots Alliance (WBA 0.00%↑) . But that wil be part of tomorrow’s story.
The Bottom Line©
Weirdly the concerns about UK pensions do not seem to be continuing into today’s session. It stands to reason that this issue is not limited to the UK, but far be it from us to second-guess the wisdom (or naïveté?)) of markets.
Barring new headlines on that, it means the PPI should set the tone for the day. A softer-than-expected reading and we could see a rally. If inflation is persistent then it could lead to selling, perhaps even violent selling. It may make more sense to keep an eye on bonds as much/more than stocks to get an assessment of investors’ risk appetite.
Pepsi earnings could also factor in to this, but that is just one company. It’s certainly possible that FOMC minutes will give rise to hope for a Fed pivot. That seems to be part of the dance we’ve been doing for months, with these hopes dashed every time.
Stocks are having a horrible year. Maybe too bad of one given the economic realities on the ground, at least in the US. But markets are forward-looking beasts, so this is about the concerns that will come once Fed rate hikes work their way through the economy. We haven’t seen the worst of that yet. Nothing is broken, really. Certainly not employment.
The silver lining is that once we know the impact of the damage we can have a rally, probably even another bull market, possibly a strong one. But we aren’t there yet. In fact, we may not even be close.
UK Pensions’ Race Against Time. Producer Price Inflation