US CPI inflation slows to 3.2% vs 3.3% forecast in October
What was the market’s reaction to this?
November 20, 2023
Global Macro Highlights
🇺🇸 US CPI inflation softens to 3.2% vs. 3.3% forecast
🛍️ US Retail sales drop 0.1% in October vs. -0.3% expected
🤝 Biden-Xi meeting delivers small wins and promises of better ties
Markets were sizzling over cooling inflation in the US. October’s CPI report showed headline and core numbers missing survey estimates by 0.1% YoY (headline at 3.2% vs. 3.3% expected). The S&P 500 immediately staged a 50 point rally from 4,430 to 4,480 over the event itself, and ended the day 1.9% higher above 4,500. 10y treasury yields were also smashed lower, breaching 4.50% after a brief fight at that level. In the wake of the print, the market has completely removed the right tail from the pricing of Federal Reserve hikes next year.
That data release was pretty much the turning point for most asset classes, switching completely to a risk on/easier financial conditions trade. Notably, oil gave ground heavily as well, with Brent Crude sliding below $80 per barrel at several points during the week. Some chop was observed in the trend, with US Retail Sales and NY Empire Manufacturing data cementing the case for a Goldilocks environment allowing the Fed to keep rates higher for longer. In turn, treasury yields retraced about a third of their selloff over the CPI news.
The Dollar was also a casualty this week on the back of lower front end yields, with most of the damage being done over the CPI event. In Asia, both the Yen and the Yuan were key beneficiaries, with the latter also benefiting from what looks like a thaw in relations between the US and China during the APEC summit, as President Biden and President Xi both met for the first time in over a year.
Malaysia Markets Highlight
🇲🇾 Malaysia's GDP growth inches up to 3.3% but remains lacklustre
📉 Malaysia's consumer sentiment, biz confidence continue to fall amid inflation, slowing external demand
In line with regional currencies, the Ringgit gained ground after the US CPI event, but price action was choppy for the most part. After a notable selldown of nearly 1% on Wednesday (though not nearly as impressive as last week’s move), USD/MYR retraced all of that move on Thursday at one point, though ultimately broad USD weakness took control as a theme. Friday’s better than expected GDP print did little to move the currency, further proving the point that the external environment matters more for now.
Malaysian consumers and businesses alike have grown more pessimistic regarding the nation’s prospects as indicated by the latest survey by the Malaysian Institute of Economic Research. Their Business Conditions Index and Consumer Sentiments Index both marked a continuation of the downward trend of 2023, reflecting that hangover from 2022’s good post-pandemic times is well underway.
In domestic bond markets, lower growth, lower inflation and the notion that the Fed is done hiking (whether this is fact or not) was a recipe for continued good times with strong performance across the government and corporate segments, with the Halogen Shariah Ringgit Income Fund benefiting as well:
The bond market moves were driven by strong gains in government bonds with the feel-good effect spilling over into other bond market segments:
➕ BlackRock ETH ETF prospectus gets filed with SEC
It’s been a rollercoaster week for crypto, despite the easier financial conditions in traditional markets. Sentiment continued to drive price action, with an official filing from BlackRock for an Ether ETF on Thursday helping to offset otherwise choppy price action in the majors. However, we highlighted last week that the Bitcoin price move above $36,000 looked to be driven mainly by the possibility of an ETF approval this week. Alas, this was not to be.
The main reason for this possibility was that the SEC had a pending deadline on another ETF application on Friday the 17th, and it had at the time yet to make a decision on it. Given that there’s expectation that the SEC’s approvals would come simultaneously, the market reasonably assumed that an approval on this application from HashDex would mean a simultaneous approval of all outstanding applications. In true SEC fashion though, it once again delayed its decision, announcing so on Thursday night. Over the course of the session, crypto pairs found themselves on the backfoot. ETH in particular was the hardest hit, perhaps demonstrating just how much sentiment and expectations had helped in driving its price higher.
That said, altcoin pairs held up well in the rout, with many majors faring relatively well compared to Bitcoin or Ether. Key amongst them was Avalanche, another Layer 1 Blockchain protocol. On Wednesday, JPMorgan announced that it was piloting the tokenisation of its funds and assets by attempting to integrate its own private blockchain with Avalanche. AVAX gained nearly 50% over the following two days, and still stands relatively strong by closing the week up 46%.
What we are monitoring for the week ahead
What does all of this mean? Our thoughts
The Q4 seasonal trade got a big lift from the latest CPI print, and it is probably getting hard for the biggest sceptics to ignore the signs that a year end rally in risk assets is the most probable outcome - sans exogenous events, of course. With the compression of volatility as well as lower yields and oil creating a supportive environment, the path of least resistance seems to be upwards.
The index option markets just went through its monthly Option Expiry event on Friday. Hedging behaviour seems to indicate that there could be a pull back in price levels, as institutions roll their covered calls and downside hedges, which then force market makers to sell spot delta to hedge these positions. We expect any dips to be shallow, as the market is likely poised to dip their toes back in ahead of year end performance chasing.
That said, care should be taken not to be over exuberant. The Fed had previously mentioned as recently as last month that the rise in long end rates was helping them tighten the economy in place of further rate hikes. We’ve seen 10y treasury yields go from 5% all the way back below 4.5%, effectively negating this tightening. Since then, we’ve had the October NFP and CPI prints which do indicate a potential turn in the fight against inflation. But an overheated financial economy is certainly something the Fed is watching, especially on the rates side, and there’s a good chance they will sound the hawkish bell again if this goes too far.
Following this train of thought, local players should be cautious when things look too good to be true and this is pertinent for the domestic bond markets in the context of the roaring rally in November thus far. Longer term indicators show that Ringgit bonds are very expensive versus Developed Markets and Emerging Market peers alike, and a soft global bond market could easily overturn and a repeat of October would not be unimaginable. Thankfully, you have a great option for refuge in the Halogen Shariah Ringgit Income Fund which managed to consistently produce positive returns in the weeks where both corporate and government bonds recorded losses.
Though it was a long shot, the hype around a potential ETF approval coming in the last week did help support prices in Bitcoin and keep the overall market cap afloat. Bitcoin still managed to close above the $36,000 level despite heavy selling over Thursday and Friday. Our stance from last week was that it was better to remain engaged instead of fading the news of a potential approval during this period, and that has still played out with a reasonable outcome.
We do find it puzzling that the hype in Ethereum over the Blackrock filing did not translate into relative strength this week. In fact, ETH was a solid underperformer in this move lower to close the week. We think that this could be explained by spot price action being driven more by speculators over this move higher. After all, ETH perpetual swap funding rates were amongst the highest we’ve seen since 2021’s bull market cycle. On the other hand, Bitcoin’s rise after hitting the August low has been helped along by a steady accumulation of spot tokens.
During times of volatility, it’s common to see dislocations in markets. Despite the stronger Ringgit, we noted that some venues onshore were showing elevated prices of the BTC/MYR cross over the week, with a particularly sharp dislocation on Friday where BTC/MYR traded at a fairly substantial premium to what should have been implied. We noted strong buying flows on that venue, which is great for existing longs, but not so great when you are looking to enter into new positions.
Thank you for reading and we’ll see you next week!
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