Overnight Headlines

*USD erased losses after falling on softer US CPI

*US stocks gave up earlier gains to close lower

*UK CPI y/y +3.2% vs 2.9% expected, m/m 0.7% vs 0.5%

*China data disappoints underscoring weak momentum

*Oil continues higher on a four-day win streak above $74

USD pulled back from one-week lows at 92.32 as the latest data showed that US inflation had cooled somewhat. AUD was the chief laggard dropping 0.7% as the RBA dampened down speculation for an earlier rate hike. EUR/USD was little changed after spiking to 1.1846. GBP/USD also jumped higher to 1.3913 before retracing back to the 50-day SMA. Money markets are now pricing in two rate hikes in 2022. JPY outperformed on safe haven demand as stocks slipped.

US equities endured a rollercoaster day before closing near the lows. Tech and healthcare fared the best with small caps underperforming. The Dow closed down -0.8%, S&P500 -0.6% and Nasdaq fell for a fifth day down -0.5%. This morning’s weak Chinese data has reinforced worries about a slowing economy amid tapering central banks and delta variant concerns. Asian stocks are lower with the Nikkei off a more than 31-year closing high yesterday. US futures are marginally in the green.

Market Thoughts – Stagflation?

US CPI inflation surprised on the softer side yesterday with core CPI at +0.1% m/m as used vehicles and airfares fell. US bond yields dropped to levels we saw two weeks ago and the bottom of the recent range. The dollar initially moved lower but reversed these losses as risk sentiment turned more negative.

Many analysts expect inflation to remain elevated for longer than policymakers currently think. Indeed, the median CPI continued up yesterday. This is due to protracted supply shortages and rising energy costs around the world. Bloomberg noted this week that consensus estimates for inflation through Q2-2022 have risen in each of their last three monthly surveys. Companies are finding it easier to raise prices and housing costs may add to upside risks going forward.

Stagflation is being increasingly talked about. This is where growth slows down more than expected (see today’s China data – slower retail sales and industrial production) while underlying inflation pressures move higher.

Chart of the Day – Buy the Dip

The S&P500 has closed lower in six out of the last seven days. The Vix is currently trading just below 20. That said, we are still down less than 3% from the all-time close. SPX hasn’t closed below the 21-day moving average for three days in a row since the mid-May correction.

The 50-day SMA is probably an even bigger level of support with prices bouncing off this indicator since springtime last year. Many traders are watching 4450 as a major level. The mid-August low at 4367 comes in below here if prices break down through the 50-day SMA. Prices have rarely dipped below this for more than a couple of days.