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The State of Inflation (CPI Preview and Inflation Expectations Update)

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What’s in Today’s Report:

  • The State of Inflation:  CPI Preview and Inflation Expectations Update
  • EIA Data and Oil Market Analysis (How High Can The Rally Go?)

Futures are modestly higher as markets bounce back from Wednesday’s declines following mixed news from China.

Positively, Chinese authorities may allow ANT Group to IPO, which is another sign China is easing pressure on tech companies. Additionally, Chinese exports handily beat estimates (16.9% vs. (E) 8.0%).

Negatively, Shanghai and Beijing reimposed some COVID restrictions, showing “Zero COVID” remains in effect.

Today focus will be on the ECB Rate Decision, and while no rate hike is expected, President Lagarde is expected to hint that a rate hike is coming in July and another rate hike is coming later this year (if it’s more hawkish than that, that will be a headwind on global stocks).  We also get Jobless Claims (E: 210K) but that shouldn’t move markets.

Market Multiple Levels: S&P 500 Chart

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What’s in Today’s Report:

  • Market Multiple Levels Chart: S&P 500

U.S. futures are tracking European shares lower this morning amid hawkish money flows ahead of tomorrow’s ECB meeting announcement.

Economically, Eurozone Q1 GDP was revised up to 0.6% vs. (E) 0.3%, bolstering bets that the ECB could raise rates by 50 bp in July which is driving bond yields higher and pressuring equities this morning.

There are no notable economic reports and no Fed officials are scheduled to speak today but there is a 10-Yr Treasury Note auction at 1:00 p.m. ET.

Bottom line, investors remain focused on high inflation and uncertain economic growth right now and if we see rates begin to meaningfully move higher again today, especially in the wake of the 10-year auction, then the S&P 500 test and potentially break down through key near term support at 4,080 today.

What the ECB’s Surprise Taper Means for Markets

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What’s in Today’s Report:

  • What the ECB’s Surprise Taper Means for Markets
  • EIA Analysis and Oil Update

Futures are modestly higher following potentially positive news out of China.

First, on the geopolitical front, Biden and Xi held a call on Thursday night where they discussed avoiding conflict.  Second, Chinese regulators clarified they just slowed video game approvals, not halted them and that’s helping Chinese tech and internet stocks to rally.

On COVID, Biden’s mask mandates are getting a lot of headlines but they won’t have any direct market implications.

Today’s focus will be on PPI (E: 0.6%, 8.3%), which will give us the latest insights into inflation and if the number is materially higher than estimates, it will likely cause some mild volatility.  We also have one Fed speaker, Mester at 9:00 a.m. ET, and markets will look for confirmation that the Fed will start tapering QE this year, but it will be gradual.

Market Multiple Table: September Update

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What’s in Today’s Report:

  • Market Multiple Table: September Update
  • Chart: The Yield Curve is Steepening

Stock futures are trading modestly lower while most overseas markets declined overnight amid lingering concerns about the Delta variant’s impact on growth as well as the threat of a hawkish shift in tone from the ECB this week.

Economically, Japanese Q2 GDP was revised up to 1.9% vs. (E) 1.6% y/y which helped the Nikkei buck the trend and rally nearly 1% overnight.

Today, there are a few potential market-moving catalysts beginning with the July JOLTS report (E 10.0M). Then there are two Fed speakers to watch: Williams (1:10 p.m. ET) and Kaplan (6:00 p.m. ET). Finally, there is also a 10-Year Treasury Note Auction at 1:00 p.m. ET.

Bottom line, markets have become more “on edge” this week as the balance between economic growth trends and subsequent Fed policy outlook has become less certain.

So any combination of economic data deteriorating, the outlook for Fed policy getting more hawkish, or interest rates accelerating too quickly will continue to weigh on equities and other risk assets this week.

ECB Decision Takeaways (Not Dovish Enough, Again)

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What’s in Today’s Report:

  • ECB Decision Takeaways (No Dovish Enough, Again)
  • Updated Oil Outlook

Futures are moderately higher thanks to solid economic data and better than expected earnings.

The EU flash PMI was stronger than expected at 60.6 vs. (E) 60.0, while good UK Retail Sales (0.5% vs. (E) 0.4%) helped offset the soft UK flash PMI (57.7 vs. (E) 61.9).  But, on an absolute basis the numbers were good, and importantly the economic recovery is still on going and has good momentum.

Earnings were good in aggregate overnight with strong reports from TWTR and SNAP, among others.

Today the key number will be the July Flash Composite PMI (E: 63.4) and markets will want “Goldlocks” data.  Specifically, that means strong activity that implies the rise in COVID cases isn’t hurting the recovery, while at the same time, activity that isn’t so strong it makes the Fed think about tapering sooner than expected, or more forcefully.

Earnings season also continues today, and four reports we’ll be watching include: NEE ($0.67), AXP ($1.64), SLB ($0.25), and HON ($1.94).

ECB Preview (Dovish Surprise?)

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What’s in Today’s Report:

  • ECB Preview (Dovish Surprise?)
  • Did Small Caps Just Bottom?

Futures are marginally higher following another night of generally solid earnings and ahead of the ECB decision.

Delta variant fears continued to recede as governments appear to be focusing on re-masking as a policy response, not economic restrictions.

Today focus will be on the ECB Rate Decision & Press Conference (7:45 & 8:30 a.m. ET) and economic data via Jobless Claims (E: 350k) and Existing Home Sales (E: 5.90M).  Markets will want to see a dovish ECB and continued improvement in claims to reinforce that the global recovery is on going, and that central banks will remove accommodation very, very slowly.

On the earnings front, there are several more notable reports today:  T ($0.78), AAL (-$1.70), FCX ($0.73), TWTR ($0.07), INTC ($1.06).

What the ECB Decision Means for Markets (Slightly Disappointing)

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What’s in Today’s Report:

  • What the Slightly Disappointing ECB Decision Means for Markets

Futures are modestly higher thanks to better than expected earnings.

Earnings after Thursday’s close were solid as GOOGL, INTC and SBUX all beat estimates and rallied after hours.  The results are offsetting Wednesday’s underwhelming results.

There were no notable economic reports overnight and no new U.S./China trade news, so markets are continuing to digest a slightly disappointing ECB meeting and focus has now turned to the Fed meting this coming Wednesday.

Today there is only one economic report, Initial Q2 GDP (E: 1.9%), which might have more of an impact on markets than usual given Wednesday’s Fed meeting, especially if it’s a big surprise in either direction (very strong or very weak).  If it’s a strong number, that will weaken the case for sustained Fed easing (which the market has priced in) and if it’s a weak number, it’ll strengthen the case for sustained Fed easing (so stocks will likely rally on a “bad is good” reaction).

Why The Dovish ECB Isn’t Good For Stocks

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What’s in Today’s Report:

  • Why The Dovish ECB Decision Isn’t Good for Stocks

Futures are modestly lower following more disappointing economic data.

Chinese exports badly missed expectations at –20.7% vs. (E) -6.5%, although that number was likely skewed by the Lunar New Year, so it’s not as bad as it looks.  German Manufacturers’ Orders also missed (-2.6% vs. (E) 0.5%).  So, the data overnight is just adding to the growth worries that came from the ECB projections yesterday and that’s why stocks are down again.

Today the key will be the Employment Situation Report.  Estimates are:  Jobs: 178K, UE: 3.9%, Wages: 3.4% yoy), and thankfully the range for a “Just Right” number is wide, as we said in our Jobs Report Preview.  But, given the recent soft global economic data, while the range for a “Just Right” number is wide, the penalty for a number being “Too Cold” and causing growth concerns or “Too Hot” and resulting in a hawkish Fed will be extreme, and if either one of those outcomes occur, it’ll likely be a painful day in stocks.

Outside of the jobs report we also get Housing Starts (E: 1.17M) and two Fed Speakers:  Daly (10:00 a.m. ET) and Powell (10:00 p.m. ET).

European Central Bank (ECB) Interest Rate Preview, September 6, 2017

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The ECB is expected to signal it will begin to taper its QE program sometime in 2018 at tomorrow’s meeting; however, the details regarding that tapering announcement remain unclear.

Why It Matters: The dollar. The falling dollar, which is down more than 10% year to date, has been an under-appreciated tailwind on the stock market (a weaker dollar boosts exports and corporate profits). If the ECB is more hawkish than expected tomorrow, that will cause a potentially big reversal in the dollar. I say that, because “long euro/short dollar” is a very crowded trade at the moment, and if it reverses, it could be violent.

The reason this meeting will punch above its weight from a market standpoint is because the ECB commentary on tapering will be (correctly) taken as implicit commentary on the strength of the euro.

The market assumes that the ECB is not concerned about current euro strength. If the ECB fails to announce tapering intentions tomorrow, or is very vague about those intentions, the market will infer that the ECB thinks the euro is too high. If that happens, the euro will drop, hard, and the dollar will soar—and that will likely be a headwind on US stocks, and a (big) tailwind on European stocks (so HEDJ will begin to rally again).

Meeting Expectations If: ECB President Draghi confirms, at the press conference, that the ECB Governing Council intends to taper QE in 2018, and that it will reveal details of that plan at a future ECB meeting. So, Draghi announces tapering is coming, but doesn’t give any details.

Dovish If: Draghi does not announce the intention to being tapering QE sometime in 2018. This is a remote possibility, but given the strength in the euro I don’t want to completely rule it out.

Mildly Dovish If: Draghi announces that the ECB intends to taper QE, and that it will announce the details at the December meeting, at earliest. Draghi likely won’t single out December, but he won’t say details will be revealed at the “next” meeting, which would be October.

Hawkish If: Draghi announces that the ECB intends to taper QE, and says the details of the taper will be revealed at the “next” meeting. That’s the key phrase to watch for. If that’s the case, look for the euro to modestly rally as there is not clear consensus on an October reveal, and that would be taken to interpret urgency on the part of the ECB, and a disregard for the strength in the euro. It’s the latter point that would cause the euro to rally.

Finally, I don’t want to say that something is impossible, but it’s incredibly unlikely that Draghi and the ECB will reveal detailed plans regarding the tapering of QE tomorrow. The wide consensus will only be to announce they want to start tapering QE.

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