U.S. Stocks May Follow China Lower if CPI Inflation Data Cools Fed Rate Cut Hopes
U.S. Stocks May Follow China Lower if CPI Inflation Data Cools Fed Rate Cut Hopes
By:Ilya Spivak
Whether weakness in appetite for risk foreshadows scarier times ahead will be tested soon
- Wall Street has been surprisingly reserved despite a flood of uplifting news.
- All eyes are now on U.S. CPI data where core inflation has stubbornly stopped falling.
- Cooling stimulus speculation may push stocks lower, echoing a reversal in China.
Wall Street has had no shortage of reasons to feel cheerful in recent weeks. The Federal Reserve issued a double-sized 50-basis-point (bps) rate cut and signaled it might follow up with 150bps in further easing, with a third of that total delivered at this year’s remaining policy meetings in November and December—and the rest next year.
The stimulus spigot has opened in China, too. Beijing dialed up efforts to revive the world’s second-largest economy with a flurry of monetary measures after five consecutive quarters of deflationary gloom. A whiff of long-awaited fiscal boost was also on display in top officials’ rhetoric, though the specifics are yet to be revealed.
U.S. economic data brightening while markets look past geopolitics
Meanwhile, U.S. economic data flow has brightened. A measure of service sector activity from the Institute of Supply Management (ISM) showed the fastest growth in 19 months. Employment growth overshot estimates by 105,000 in September, while August and July figures were revised higher. The jobless rate fell, and wage growth accelerated.
The picture is not without blemishes. Wars continue to rage between Russia and Ukraine as well between Israel and Iran-backed terrorist groups, Hamas in Gaza and Hezbollah in Lebanon. Jittery market-watchers worry that a broader regional conflict may be triggered. That Jerusalem and Tehran engaged in a series of direct tit-for-tat strikes elevates the risk.
Nevertheless, the markets seem relatively sanguine. Most tellingly, the spread between U.S.-based West Texas Intermediate (WTI) crude oil price benchmark and Brent, its European counterpart, has trended lower since the beginning of the year, falling below its long-term average. This implies the absence of war-related supply disruption fears.
Against this backdrop, it is somewhat surprising that equity markets are not cheering louder. The bellwether S&P 500 stock index has extended less than 1% above its high scored in the immediate wake of the Fed’s bold action in September. The tech-tilted Nasdaq 100 is struggling to maintain a hold on August’s high, never mind July’s record peak.
U.S. CPI inflation data threatens the stock market
Whether this weakness in risk appetite foreshadows scarier times ahead will be tested with the release of September’s much-anticipated U.S. consumer price index (CPI) data. Overall inflation is expected to tick down to 2.3% year-on-year, the lowest since February 2021.
Falling energy prices may be the biggest driver at the headline for a second month, however, which is cold comfort for Fed officials because they don’t have much influence on such things and can’t hope to ensure they keep trending favorably. Instead, the central bank is focused on the core measure that excludes energy and food costs.
That is expected to remain stubbornly unchanged at 3.2% for the third consecutive month. Similar stalling on the path to disinflation forced Fed officials to delay rate cuts in the first half of 2024. More of the same may be interpreted from this week’s data.
China’s stock market has turned sharply lower as hope for stimulus wanes after an eye-watering two-week rally of nearly 43%. The ASHR ETF tracking the situation is down almost 22% this week after approaching a three-year high. If hopes for Fed policy support are also watered down, U.S. shares may stumble too.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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