Markets absorb disappointing earnings as crypto uncertainty knocks sentiment

Having come off the back of three days of losses the US dollar rebounded strongly yesterday as markets absorbed further disappointing earnings numbers, and cryptocurrency exchange Binance backed out of the FTX takeover, due to an $8bn shortfall, prompting a rout in cryptocurrencies in the process.

This jittery market backdrop prompted a sharp selloff in US markets after Europe had closed, with the Nasdaq 100 leading the losses, snapping a 4-day rise for it, as well as the Dow and S&P500.

The late weakness seen in the US looks set to filter into today’s European open, as we look ahead to this afternoon’s US CPI report for October, Michael Hewson, CMC Markets’ chief market analyst, said this morning.

“While US headline CPI has been slowly coming down from its summer peaks of 9.1%, the same cannot be said for core prices which have continued to trend higher, and which hit a 40 year high of 6.6% in September,” he noted.

“With the latest earnings season well underway it has become apparent that companies are passing on increases in costs to consumers with varying degrees of success, and this trend is now starting to embed itself in underlying core prices, squeezing consumer incomes further,” Hewson explained.

The September core CPI reading prompted markets to price in the certainty of a 75bps rate hike in November which has just been delivered, while also potentially pricing in the prospect that we could see a 75bps move in December.

Since that September core CPI reading of 6.6%, Hewson noted “the discussion has moved on somewhat” and the base case is no longer a 75bps move next month, but a more modest 50bps.

“Powell’s press conference earlier this month did change the narrative somewhat away from the size of rate hikes, and more towards the duration and final destination of the headline rate.”

Michael Hewson

His more hawkish tone suggested that the eventual terminal rate could well be much higher than 4.5% and could be as high as 5%, and which saw US yields soar to their highest levels since 2007, increasing concerns that the Fed was deliberately looking to slow the US economy.

“From the tone of this month’s Fed meeting, it seems that the FOMC is still working on the premise of erring on the side of doing too much rather than too little, and if that means stock markets go down so be it,” Hewson explained.

“The fact that stock markets have gone up since then suggests that for all the hawkish talk, markets still think that the Fed may have to back off as the economy slows, however today’s CPI report could shatter that narrative if prices don’t start to show signs of softening,” he continued.

“This is why today’s CPI number is so important, although it probably won’t make that much difference in terms of what to expect in December,” he pointed out.

The prospect of a 50bps move and a step down is more or less baked, and it would take a significant downside miss to even think of a more modest 25bps move.

“The real risk is an upside surprise as we look for headline CPI to show further weakness and slip back further from 8.2% to 7.9%. This would also be the 4th,” Hewson wanred.

“A successive monthly decline after headline inflation peaked at 9.1% in June, however this isn’t the important number as far as markets are concerned.”

Core prices are the main focus and they accelerated in September, pushing up to a 40 year high of 6.6%, and they’ve been sticky all year.

Markets will be looking for evidence of a slowdown here if the narrative of slowing inflation is to take hold. The rise in the US dollar does offer cause for optimism, given it acts as a brake on higher prices.

“Today we’ll find out whether core prices are giving any indication of slowing down,” Hewson concluded.