Weekly Market Insight October 16th 2017

U.S. consumer prices (CPI) recorded the largest increase in eight months during September. The Labor Department said CPI rose 0.5% last month after advancing 0.4% in August. This was the largest gain since January and lifted the YoY change in the CPI to 2.2% from 1.9% in August.

One key driver was the surge in gasoline prices following hurricane-related production disruptions at oil refineries in the Gulf Coast. Gasoline prices roared higher by 13.1%in September and as such are the root cause of three-quarters of the CPI rise. To give the increase some context, the increase in gasoline prices was the largest since June 2009 and was over double the 6.3% gain in August.

That said, the market drew encouragement from the fact that underlying inflation remains subdued. Core CPI i.e. ex-food and energy gained just 0.1% in September cf. a gain of 0.2% in August.

No doubt the Fed will be digesting the detail of these figures given the recent minutes show officials have indicated a lack of uniformity in their policy perspective and so whilst likely, a December increase of 25 bps in Fed Funds is not certain.

Retail sales rose in 1.6% in September, just shy of the forecast 1.7% pointing to a stronger economy, the Commerce Department reported on Friday. Retail sales in August fell 0.1%, which was revised from -0.2%. Consumer spending accounts for as much as 70% of U.S. economic growth.

U.S. Treasury yields fed off the soft-core inflation as yields eased on Friday and so overlooked higher gasoline prices and strong retail sales. The Dollar, rather surprisingly regained ground lost earlier in the day, however, it closed the week at the lowest level for five weeks.

It was up to new heights in major world equity markets as they hit their fourth record high in a row. Wall Street moved higher as sentiment swung behind the view that soft-core inflation would curb future interest rate hikes while others eyed trade discussions and retail data.

A Monday’s trading started Asian shares advanced to a decade high, while U.S. oil futures jumped toward a six-month top as rising tension between the Iraqi government and Kurdish forces threatened supplies.

European markets will look ahead to more concern about Spain and Catalonia. Of course, the European Union have weighed in as European Commission President Jean-Claude Juncker has said he does not back Catalan independence, fearing others may follow the same path. A nod toward worry over Italian elections in May 2018.

Spain has been in a state of turmoil since the separatist government in Catalonia held a disputed referendum at the start of October. Of those that could vote, 90% opted for independence. Catalan leader Carles Puigdemont has been urged by the Spanish Prime Minister, Mariano Rajoy to explain if he has declared independence.

If Mr Puigdemont confirms by Monday that he has, he will be given a further three days to withdraw the declaration.

If this does not work, Madrid has threatened to invoke Article 155 of the constitution to allow Spain to suspend Catalan autonomy and impose direct rule. So be careful on Wednesday/Thursday as that could be when the Spanish situation becomes extremely uncomfortable. Spain’s 5-Year CDS has eased from 71.23 bps last week to 68.34 bps on the 13th, methinks a touch of complacency is afoot. That, plus Spanish yields and the IBEX 35 could face a tricky end to the week.

Looking ahead to the key G7 data releases Tuesday sees UK CPI for September where 3.0% is expected cf. 2.9% before and so well above the 2.0% target. Eurozone CPI for the same period will be steady at 1.5%.

The Euro may receive a significant boost on Tuesday when German ZEW economic sentiment is released. This is an October data point and is forecast at 20.0 compared to 17.0 in September.

The UK will have trending Average Wage Growth data on Wednesday, however, more disappointment will come on Thursday when Retail Sales for September are likely to be soft at -0.2% cf. 1.0% in the prior month.

The week ends with two interesting US data points as on Thursday the Philly Fed Index for October is forecast at 22, down slightly from 23.8 in September. Then on Friday we round out the week with Existing Home Sales. This is significant as it indicates the liquidity in the preexisting property market; look for 5.30 Million as an annual rate. This will be frustrating as the figure in August slipped 1.7% MoM to a seasonally adjusted annual rate of 5.35 million from 5.44 Million in July. That was a new low since August of 2016, so the real estate market will be under pressure again.

On the global front, the US attitude toward Iran will be a slow burner, however, remain vigilant, especially when it comes to North Korea.

Of more immediate interest is the 19th National Congress of the Communist Party of China in Beijing. It opens on Wednesday 18th. The congress is closely watched mostly due to a far-reaching change in the makeup of the top leadership of the Communist Party of China. This is particularly the case this year as a majority of the Politburo Standing Committee is expected to retire at this congress.