Inflation fears persist as US earnings season kicks off

Inflation fears persisted overnight with the US dollar continuing to march higher, despite long-dated US yields falling. New York markets seemed more preoccupied with the yield curve flattening as short-dated yield firmed once again. That weighed on equities once again which are also pre-occupied with the kick-off of the US Q3 earnings season, led out of the gates by JP Morgan today. Critical this time around will be the Q4 and 2022 outlooks by corporate heavyweights. Most especially is whether their outlooks are pared back as supply chain woes, higher inflation and funding costs, higher energy, etc, take their toll. With equities so heavily priced towards a linear post-pandemic recovery, and with the Fed looking increasingly likely to withdraw the easy money punch bowl, we can expect a lot more two-way volatility in equity markets in Q4. Indeed, Fed officials Clarida and Bostic both alluded to as much overnight.

IMF cuts global, US growth forecasts

The IMF slightly reduced their global growth forecast overnight but slashed a full percentage point of US 2021 GDP to 6.0%. It also warned central banks that they may need to move quickly to tighten monetary policy if inflation spikes, despite reiterating that it felt inflation was transitory. The dovishly hawkish, or is that hawkishly dovish, IMF taking a leaf out of the options open playbook of many a central bank these days. One part of the world that isn’t so concerned about inflation is Europe. ECB member Villeroy yesterday expressing concern at the short-term inflationary pressures but stating the ECB risks falling short of its 2023 inflation target, which is 2.0%. His comments kept on the pressure on the European yen, I mean the euro, overnight.

The US JOLTS Job Openings for August slumped to 10.439 million overnight but had little impact on markets as data showed a record 4.3 million Americans quit their jobs in August, presumably because they could get more money and better conditions elsewhere. Once again, I will say that a US Non-Farm Payroll number of 194,000, is inconsistent with a JOLTS of 10.4 million. Something has to give. Either a lot of Americans are suddenly going to go back to work, or wage-price inflation is going up.

In Asia today, New Zealand and Australian Consumer Confidence remained subdued thanks to their respective Covid-19 situations. South Korean Unemployment ticked slightly higher to 3.0%, while the Reuters Japan Tankan Index for October eased to 14% and Machinery Orders MoM for August slumped by 2.40%. With markets focused on the start of the Q3 US earnings season, reaction has been muted, and in Australia’s case, tomorrow’s employment data carries a much higher weight in investors’ minds.

Today’s data highlight in Asia is the China September trade data at 1100 SGT. Exports and Imports are expected to hold just above 20% YoY. Both numbers need to perform though, or else the China slowdown gremlins will win the day, and that is likely to weigh further on China equities this morning. Conversely, steady to higher import and export numbers will soothe China nerves, against a background of energy woes and supply chain challenges and the never-ending series of government clampdowns of economic sectors, which appears to have moved to the financial sector now. The government’s “shared prosperity” drive I believe, will continue to be a headwind for China equities going forward.

German inflation will be of passing interest this afternoon along with the UK’s trade, GDP, and industrial production data dump. But all eyes are likely to be focused on US inflation data released this evening with Core Inflation in September expected to hold at 4.0% YoY, and headline inflation remaining at 5.30%. There is likely to be a binary outcome to the data with high prints jarring Fed taper nerves with higher US yields, a higher US dollar and lower equities. Lower prints should see the opposite occurring although I believe this will be a temporary aberration lasting only a day or so.

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