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Dow Future stumbled to a multi-day low around 33986 Wednesday on stagflation concern as inflation expectations soared. Fed officials are increasingly sounding cautious about inflation and indicating earlier than expected tightening. But Dow Future recovered late Wednesday as sequential core CPI was almost unchanged in September, while the latest FOMC minutes show Fed’s QE tapering plan in line with market expectations. Further on Thursday, Dow Future surged to 34842 on earning optimism after JPM and BlackRock beat forecasts followed by Citigroup, Wells Fargo, Bank of America, Morgan Stanley and UnitedHealth. Higher oil also boosted energy stocks.
Meanwhile, fresh economic data provided additional support with U.S. jobless claims falling to a new pandemic-low and producer prices inflation (PPI) rising less than expected. The U.S. core PPI increased +0.2% in September sequentially (m/m), easing from +0.6% recorded in August, and well below market expectations of +0.5% gain. Yearly the core PPI jumped +6.8% in September, the highest on record, but lower than the market expectations of +7.1%. The headline PPI surged +0.5% in September sequentially from +0.7% in August, lower than the market expectations of +0.6% and the smallest increase so far in 2021. Yearly (y/y), the U.S. PPI jumped +8.6% in September, the highest since Nov’10 against +8.3% recorded in August, but lower than the market expectations +8.7%. Headline PPI was mainly boosted by higher energy prices and food items.
Overall, as per recent run rate correlation, the U.S. core PCE index may increase by +0.30% in September and inflation may be plateauing, although it remains sticky. The narrowing divergence between core CPI and core PPI index may be also indicating producers are unable to pass on higher input costs to consumers resulting in the easing of inflation in 2022, which may prompt the Fed to go for only one rate hike by Dec’22 instead of two hikes in H2CY22.
Fed is set for liftoff by Dec’22 after the completion of QE tapering by June-Sep’22 timeline. Now the question is whether Fed will opt for one or two rate hikes in H2-2022. Fed is already behind the inflation curve. Thus Fed will primarily judge the maximum employment mandate for its liftoff decision. On Thursday all focus was also on U.S. jobless claims, which serves as a proxy for the unemployment trend.
The U.S DOL flash data shows the number of Americans filing initial claims for unemployment benefits (UI-under insurance) slips to 293K in the week ending 9th October, from downwardly revised 329K in the previous week, lower than the market expectations of 319K and the lowest since Mar’20 (pre-COVID).
The continuing jobless claims in the U.S., which measure unemployed people who have been receiving unemployment benefits for a while (more than a week under UI), further dropped to 2593K (fresh post COVID low) in the week ending 2nd October, from an upwardly revised 2727K a week before and below the market expectations of 2675K.
The number of Americans applying for financial help from the PUA scheme, which covers uninsured workers that do not qualify for initial claims (under UI), decreased to 21.624K in the week ending 9th October, from an upwardly revised 23.506K in the previous period.
Overall, the latest jobless claims may indicate around 154765K employed persons by Oct’21 against Fed’s target (??) of 155000K for the start of QE tapering. Thus Fed may announce the QE tapering timeline in the Nov-Dec’21 meeting and the QE tapering will end by June-Aug’22, depending on the actual pace ($20-15B per month). And if inflation moderates around +2.00% in CY22, then-Fed may go for one hike by Dec’22; otherwise if it continues to hover well above +2.50%, then-Fed has no option but to go for two hikes by H2CY22 and may also start QT by early CY23.
Technically, whatever may be the narrative, DJ-30 now has to sustain over 35050 for a lifetime high; otherwise may retreat. The similar ‘do or die’ levels for NQ-100 and SPX-500 are now around 15200 and 4440.
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