The much hotter-than-expected CPI does not offer much in the way of pleasant news for equity markets, with 10-year Treasury yields topping 4 %. The second-round effects of inflation are clearly being felt across the economy. While the Fed remains on autopilot for a 75bp hike in November, investors will need to think more seriously about 75bp in December. If The FOMC minutes indicated a data-dependent Fed that requires a high hurdle to pause its rate-hiking cycle, that hurdle got immeasurably higher. The strong CPI only reinforces the view that there is no way the Federal Reserve can contemplate a 'pivot' this year. For the dollar, USD long fatigue was starting to emerge, but the USD higher is still the path of least resistance. Synchronized global growth is the best USD-lower environment, but that is nowhere to be seen. Other catalysts, such as China ending zero-covid or easing European energy fears, also look well beyond the horizon, as is the Fed. pivot. The topside CPI beat adds further persuasion to short the Yen. How quickly USDJPY can get to the Y150 will be partly determined by a materializing bond market engagement to see if the US 10y yield can finally settle above 4%.

The Retail Sales Control Group is foreseen at 0.3% in September after the previous miss. Core Retail Sales are set to drop by 0.1%, as high inflation digs a hole in consumers’ pockets. Only upside surprises in the headline and Core figures could revive the US dollar uptrend. Amidst the continued drop in gasoline prices, easing inflation expectations and improvement in American consumers’ confidence, yet another rise in US Retail Sales may not come as a surprise for the month of September. The more precise gauge, the Control Group is expected to show an increase, which could have a significant impact on the US dollar trades. The US Census Bureau will publish the data on October 14 at 12:30 GMT. The US consumer spending, as represented by Retail Sales, is expected to rise by 0.2% MoM in September after recording an unexpected increase of 0.3% in August. The July Retail Volume was revised lower to a 0.4% decline. Meanwhile, the Retail Sales Control Group (ex-food services, autos, gas, building materials) for September is seen higher at 0.3% versus August’s 0%. The core Retail Sales (ex-Autos) are likely to decline by 0.1% MoM in the reported month vs. -0.3% reported previously. Note that the figures aren’t adjusted for inflation. In August, American shoppers showed resilience despite a four-decade high inflation rate, as a majority of retail categories grew last month, as cheaper fuel prices allowed Americans to spend on food, motor vehicles and other discretionary purchases such as building materials and garden equipment. Trading the US dollar with Retail Sales A below-forecast reading for the Control Group cannot be ruled out after the previous miss. The headline print, however, could grab more attention again if it surprises the upside this time as well. For the US dollar to regain the upside traction, the Core figures also need to show an unexpected increase. The data is unadjusted for inflation and, therefore, only the above estimates readings would represent real growth in sales. If the Core Retail Sales print below estimates or even matches the forecasts, it could imply that consumers are feeling the pinch of widespread inflation notwithstanding some relief from falling prices at the gas station. It could weigh on the dollar temporarily, as expectations of steeper Fed rate hikes to tame inflation will overpower and keep the dollar bulls afloat.   It’s worth noting that the US dollar’s reaction to the Retail Sales release could be influenced by the persisting risk trend and Fed rate hike expectations, as the data succeeds the all-important Consumer Price Index (CPI) release due on Thursday. The US inflation is the most critical gauge and will determine the size of the November Fed rate hike, especially after Wednesday’s FOMC minutes. The minutes showed that the Fed members “expect higher borrowing costs to slow economic activity by curbing spending, hiring and investment, which should weaken inflation pressures.” At the moment, markets are pricing an 81% probability of a 75 bps Fed rate rise next month. To conclude, Friday’s US Retail Sales and University of Michigan (UoM) Consumer Sentiment data will be also closely scrutinized, as they will shed additional light on household trends amid rising interest rates and the ongoing cost of living squeeze.

Equities fall sharply on Friday as the jobs market remains strong. Equities still closed higher on a volatile week, while Monday, Tuesday saw massive gains. Oil prices spike as OPEC+ cuts supply, all eyes now on CPI data. Another week of huge volatility for financial markets was met with a certain resignation on Friday. Early indications for the week were positive with a massive two-day rally to set things off as the Fed pivot talk once again took centre stage. This saw a massive 6%-plus, two-day rally for most of the main indices before some flatlining ahead of Friday's jobs report. The hope was for a weak number to continue the Fed pivot hopes. However, what we got instead were more signs of a strong labour market that will need to take a few more interest rate hits before it falls to the canvass. The unemployment rate dipped to 3.5%, while the payrolls number showed gains of 263K, just below the 270K consensus. This reinforced the hawkish comments from Fed officials, which markets had ignored earlier in the week. Bond yields once again spiked with the 2-year closing at a yield of 4.3% and the 10-year just shy of 3.9%. Fed funds futures markets priced the near certainty of another 75bps hike in November, and as a result equities sold off aggressively. Despite all the doom and gloom the S&P 500 (SPX) actually gained 1.6%. Energy was back on its throne as the biggest winner. OPEC+ announced a 2 million barrel per day oil supply cut that sent crude oil prices spiking higher midweek toward $90. This will also not help the Fed pivot hopes. Energy (XLE) rose over 13% on the week, while the continued rate hikes meant real estate (XLRE) was the worst-performing sector on the week.  We now turn our attention to the week ahead with two key events, one micro and one macro. First, it is earnings season. Investors have been nervously anticipating this one for a while now, and as ever the banking sector is first up. We do have to question how much bad earnings news is priced in given the mess we have already seen from FedEx (FDX) and Nike (NKE) to name a few. Apple (AAPL) will be the key as in a proper full-on capitulation the leaders are the last ones to topple. If we are indeed about to capitulate, then AAPL will need to move seriously lower. On the macro front, it is all about Thursday's CPI. Another hot number would lead to curtains for the stock market. The spike in oil will not have an effect this time out, so hopes are growing for a calming number. Again though, how much is priced in?  We notice the conditions for a counter-trend rally are higher than we would have expected. A number of factors support the theory. First, earnings season has arrived as mentioned. Analysts have lowered the bar with forecast downgrades, and investors largely expect a bad season. We had a similar situation in Q2, and the worst fears were not realized. Perhaps this will be more of the same. Second, positions and sentiment are again maximum bearish.  Source: CNN.com Meanwhile, the American Association of Individual Investors Sentiment Survey is also near max bearish. Hedge funds are overly shot and could be squeezed. CTA trend-following systems are near maxed out also and will run to longs in a big way if the rally picks up. We are also close to the max period for corporate buybacks, which will soon begin to pick up again.

US BLS will release the September CPI figures on October 13. Markets expect core inflation to rise 0.5% on a monthly basis in September. Markets are pricing in an 80% probability of a 75 basis points Fed rate hike next month. The US Bureau of Labor Statistics will release the Consumer Price Index (CPI) figures for September on Thursday, October 13. Although the Fed uses the Personal Consumption Expenditures (PCE) Price Index data as its preferred gauge of inflation, market participants are likely to react more significantly to the CPI data simply because it's published two weeks before the PCE. Additionally, the CPI is widely seen as a better measure of what consumers observe with regard to changes in prices. Investors expect the headline annual CPI to decline to 8.1% from 8.3% in August. The Core CPI, which excludes volatile food and energy prices, is seen edging higher to 6.5% from 6.3% in the same period. On a monthly basis, the CPI and the Core CPI are expected to arrive at 0.5% and 0.2%, respectively. Since the monthly figures are not distorted by the base effects, they are likely to paint a more accurate picture of core inflation. Previous Core CPI (MoM) releases  It's worth noting that the September jobs report showed that Nonfarm Payrolls rose at a stronger pace than expected in September and that the Unemployment Rate declined to 3.5% from 3.7%, allowing the Fed to stay focused on battling inflation.  Market implications When the data for August showed that the Core CPI rose by 0.6%, compared to the market expectation of 0.3%, the probability of a 75 basis points rate hike in September rose sharply and the US Dollar Index (DXY) gained 1.5% on a daily basis. Currently, the CME Group FedWatch Tool shows that markets are pricing in a nearly-80% probability of one more 75 bps rate hike in November. Hence, the dollar's potential gains on a stronger-than-expected monthly core CPI reading are likely to remain limited. Also, following August's surprise, investors seem to have already prepared for a strong inflation report by forecasting a 0.6% monthly increase. At this point, only a monthly increase of between 0.8% and 1% in Core CPI could be significant enough for market participants to start considering the possibility of a 100 bps rate hike in November and trigger a fresh rally in the US Dollar Index. Source: CME Group On the other hand, a soft inflation report with the monthly Core CPI coming in much lower than analysts' estimate, between 0.2% and 0.4%, could open the door for a risk rally. In that case, Wall Street's main indexes could post impressive gains and the USD is likely to suffer heavy losses against its major rivals in the short term. Nevertheless, unless there is a negative Core CPI print, investors are unlikely to scale back 75 bps hike bets, helping the dollar hold its ground after the initial reaction. FOMC policymakers made it clear that they will not overreact to one-off inflation data and that they will stay on the tightening path until they are convinced inflation is falling steadily.  Finally, in case CPI figures come in largely in line with analysts' projections, the DXY is likely to return to pre-release levels once the dust settles following the knee-jerk market reaction.

Stock investors are a bit on edge ahead of upcoming critical inflation data and the start of Q3 earnings season. Fed pivot Bulls are hoping the Producer Price Index on Wednesday and Consumer Price Index on Thursday will confirm their belief that inflation has "peaked" which in turn could spark another rally as investors return to bet on the Fed backing off its tightening program. A so-called "Fed pivot" has been anticipated and rallied upon multiple times this year already, only to be dashed by continued strong inflationary data and tough talk from Fed officials. Economists say that interest rate hikes can take 6 months or more to filter through the economy and impact inflation, so the worry remains that the Fed goes too far, too fast and ends up "breaking" something. Warnings about a potential recession continue to circulate with JPMorgan CEO Jamie Dimon the latest to forecast a recession in 2023 that could be compounded by the Fed's aggressive rate hikes and Russia's war in Ukraine. Of course Russia's war has roiled energy, grain, and other commodity markets, which in turn have kept upward pressure on inflation. Food supplies Keep in mind, global food supplies have even bigger problems than just Russia and Ukraine, with severe droughts and extreme flooding taking a toll on nearly every continent. The Fed has no ability to control commodity supplies or prices but they also can't keep lifting rates indefinitely. Due to the dysfunction already witnessed in some financial markets as well as signs that the US economy is slowing down, many bulls still believe the Fed will, at the very least, go for smaller rate hikes starting in November or December. Money supply For those that believe inflation is more of a money supply problem - aka due to a massive increase in the amount of money in the financial system - it's worth noting that the Fed stopped contributing to that in March when it made its final asset purchases as part of "quantitative easing." The central bank is now essentially removing money from the system via "quantitative tightening" as it allows mature bonds to roll off its balance sheet. Additionally, you could count the Fed's rate increases, which also began in March, as a money supply-reducer as it hinders borrowing. Economists also say it takes around 6 to 18 months for reductions in the money supply to impact inflation. However, it is still not clear what the Fed would consider a "clear sign" that inflation is on the retreat. Data to watch Investors hope the "minutes" from the Fed's last meeting, which are due out on Wednesday, might provide some additional clues on that front. Today, investors won't really get any new data to chew on besides the NFIB Small Business Optimism Index. There also aren't any notable US earnings on tap, although investors are growing a bit more nervous that the forward guidance could further dampen the outlook for the quarters ahead, especially as the US dollar remains stubbornly strong. That in turn could burst the bulls' hopes to regain lost ground off the back of better-than-expected Q3 results.

US stocks tanked at the end of last week, after the stronger than expected US NFP report for September reinforced the Federal Reserve’s hike-and-hold path for interest rates, which are pushing up recession risks for the US and the global economy. The Conference Board now predicts a 96% chance of a recession in the US within the next 12 months.  While US GDP has already registered a technical recession, The Conference Board’s measure is more accurate. Right now, it predicts that the US economy will experience a recession in Q4 2022 and Q1 2023. The question now is, when will the US economy climb out of recession? We will be watching the The Conference Board recession probability model closely, as it is also good at predicting the end of recessions when it falls rapidly, usually one or two months before the economy starts to pick up. Thus, watch chart 1 closely in the coming months to determine the turning point for the US economy. Economic and corporate data this week will be important in helping us to figure out just how bad this recession will be. US CPI on Tuesday and the start of Q3 earnings season in the US are worth watching closely.      Dollar headwinds start to cause problems  Looking at earnings season first, analysts are expecting a feeble set of results, with $34bn slashed from earnings estimates over the last 3 months. Analysts now expect S&P 500 companies to post earnings per share growth of 2.6% in the three months to September, at the start of July analysts had been looking for a bounce back for earnings, with 10% growth expected. Thus, this is the largest cut to earnings since the pandemic. A perfect storm of higher interest rates, weak consumer sentiment and stubbornly high inflation have darkened the outlook for this earnings season. This has been reflected in stock market performance in recent months, with stocks tanking again at the end of last week. Earnings season is likely to be closely watched and could trigger bouts of volatility.    The FX problem for US blue chips  FactSet, the data gathering company, has noted that 50% of companies that have already reported Q3 earnings, about 4% of companies on the S&P 500, have cited unfavourable foreign exchange rates as having a negative impact on their earnings. This is a far higher percentage than last year at the same point in the earnings season and concerns about the strong dollar have been steadily growing in the last four quarters. Of all the factors analysed by FactSet so far in Q3 earnings season, only higher interest rates have triggered a larger quarter-over-quarter increase in negative citations so far. Given that the dollar has been rising strongly, and that 40% of S&P 500 companies have significant overseas earnings exposure, it is no wonder that FX rates are a concern. This will be worth watching over the rest of earnings season, and we expect to see more companies complain about the strong dollar, especially after momentum in the US dollar has ramped up significantly in recent months.    A bright side for Q3 earnings season?  While there are notable headwinds for the S&P 500 and global blue chips as they report Q3 earnings, it is possible that we could see some upside surprises. Despite analysts revising down their estimates for Q3 EPS growth, companies have been more positive in their earnings guidance for Q3 relative to recent quarters. What does this mean? Of the 106 companies that have issued forward guidance for Q3, 65 have issued negative guidance and 41 have issued positive guidance.  This is above both the 5- and 10-year averages. Companies in the real estate, industrials and consumer discretionary sectors have recorded the largest increases in positive EPS guidance for Q3. In terms of the market reaction, FactSet have found that the market is punishing S&P 500 companies who issue negative guidance by a bigger margin than average, while they are rewarding companies that issue positive guidance, with companies’ stock prices rising 3.1% in the days after the positive guidance was issued. The market is extremely sensitive right now, so it will be watching out for guidance for Q4 earnings and beyond. However, if companies surprise on the upside during Q3 earnings season, then we may see a bounce back in stock prices in the coming weeks.    US economy: Sticky inflation back at 1990 levels  The market is laser focussed on Federal Reserve monetary policy right now and US stock markets are mostly lower on Monday, with volatility having jumped at the start of the week. A key theme for markets right now, is the prospect of dovish pivot from the Fed. Hopes were dashed on Friday, when the US unemployment rate unexpectedly fell. Fed speakers are...