Higher Crude Oil Prices and Loose Monetary Policy May Support Higher Inflation In Months Ahead

Alexander Garcia
10 Oct, 2024
Miami

Stocks on Wall Street struggled after consumer price inflation was ahead of market expectations and initial jobless claims soared.

The S&P 500 index edged down 0.2% and the Nasdaq Composite rose 0.1% on the worry that the Federal Reserve may slow down its rate-cut cycle following the stubborn inflation report. 

Despite the Fed's eleven rate hikes over 2022 and 2023, inflation has not dropped near the target rate of 2%, indicating rates are still not restrictive enough. 

Overall inflation has been moderating since June 2022, but that decline is largely reflecting the fall in energy prices, which are not impacted by the Fed's policy decisions. 

Moreover, inflation is likely to rebound from November when comparison with the previous year becomes tougher because of the lower base. 

Despite the Fed's tough talk on inflation, core inflation is still above the Fed's target rate and may swing higher because most services are still passing higher prices to consumers.   

In other words, interest rates have never been restrictive enough for inflation forces to be tamed, since the onset of the COVID-19 in 2020. 

 

U.S. CPI Declines but Core CPI Rebounds In September

Consumer price inflation slowed to 2.4% in September, the sixth consecutive month of decline, the U.S. Bureau of Labor Statistics reported Thursday. 

Overall inflation dropped to the lowest level since February 2021. 

The decline in inflation largely reflected the weakness in energy prices, and energy costs fell at a faster pace of 6.8% compared to 4.0% in the previous month. 

The cost of shelter rose at a slower pace of 4.9% compared to 5.2% in the previous month. 

However, food inflation accelerated to 2.3% from 2.1%, and transportation jumped to 8.5% from 7.9%. 

Core inflation edged up to 3.3% in September after staying at a three-year low of 3.2% in the previous two consecutive months.

 

Hurricane and Michigan Layoffs Drive Weekly Jobless Claims Higher

In other economic news, initial jobless claims rose by 33,000 to 258,000 for the week ending October 5, the Department of Labor reported Thursday. 

Initial jobless claims increase was driven by the increase in claims in Florida by 3,842 and North Carolina by 8,534 following the widespread damages caused by Hurricane Helena. 

Moreover, large-scale layoffs in Michigan, driven by 10,667 job losses in manufacturing and management over the past two weeks, also contributed to the increase in weekly claims. 

Continuing claims, which lag by one week, rose 42,000 to 1.861 million. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index decreased 0.1% to 5,784.13, the Nasdaq Composite rose 0.1% to 18,302.15, and the Russell 2000 index declined 0.9% to 2,182.11.

The yield on 2-year Treasury notes edged lower to 3.98%, 10-year Treasury notes inched up to 4.07%, and 30-year Treasury bonds inched higher to 4.36%.

WTI crude oil increased $2.79 to $76.04 a barrel, and natural gas prices edged down 3 cents to $2.62 a thermal unit.

Gold fell by $16.10 to $2,624.16 an ounce, and silver increased by $0.57 to $31.07.

The dollar index, which weighs the US currency against a basket of foreign currencies, edged higher to 102.90.

 

U.S. Stock Movers

Delta Air Lines declined 0.2% to $50.72 after the company's forward-looking outlook disappointed some investors. 

Revenue in the third quarter increased 1% to $15.7 billion from $15.5 billion, net income increased 15% to $1.3 billion from $1.1 billion, and diluted earnings per share rose to $1.97 from $1.92 a year ago. 

The airline said the direct revenue impact caused by the CrowdStrike-caused outage on August 8 was about $380 million, and the fuel expense was $50 million lower because of 7,000 flight cancellations over the five-day period. 

Hurricane Milton exited from the Florida East Coast, leaving behind a wave of destruction, flash flooding, and power outages for at least 3 million residents. 

Universal Insurance, which primarily provides catastrophic insurance in Florida, rose 10.9% to $10.82.

Other property insurance companies with significant Florida exposures rebounded after falling in the previous three consecutive sessions. 

Allstate Corp. increased 1.2% to $187.26, Fidelis Insurance jumped 2.2% to $17.90, and Progressive Corp. gained 0.9% to $252.82. 

Generac Holdings declined 2.8% to $167.36, and the generator provider had run up as much as 11% over the last three days as Hurricane Milton had intensified. 

 

European Markets Traded Around Flatline

European markets lacked momentum on Thursday as investors reassessed the future rate path amid elevated geopolitical tensions. 

Benchmark indexes in London, Paris, and Frankfurt struggled to rise above the flatline as investors worried that weak economic growth in the Euro Area could crimp corporate earnings in the second half. 

On the economic front, investors reviewed Germany's retail sales, Swedish GDP growth, and Norway's inflation data. 

 

Germany's Retail Sales Growth Accelerated In August 

Germany's retail sales in August accelerated to a monthly increase of 1.6% in August from 1.5% in July, the Federal Statistical Office, or Destatis, reported today. 

Monthly retail sales rose by the same amount in both real and nominal terms, adjusted for calendar and seasonal effects. 

Food sales increased 1.9% and nonfood sales rose 1.1%, and e-commerce and mail order sales advanced 8.9%. 

From a year ago, retail sales rose 2.1% after adjusting for inflation and increased 3.1% in nominal terms. 

The statistical office resumed reporting retail sales after suspending in June due to technology issues encountered during a conversion process while meeting new EU data requirements. 

Retail sales rebounded after falling monthly 1.4% in May and 1.1% in June. 

 

Norway's CPI Accelerated in September 

Norway's consumer price inflation increased 3% in September from 2.6% in August and rebounded to the highest pace since May, Statistics Norway reported Thursday. 

Consumer price inflation, adjusted for tax charges and energy prices, increased at a slower pace of 3.1% in September from 3.2% in August, dropping to the lowest level since August 2022. 

 

Sweden's GDP Expanded at the Fastest Pace in 13 months

Sweden's GDP growth in August rebounded to 1.1% from the downwardly revised 0.9% decline in August, Statistics Sweden reported Thursday. 

The monthly rate of increase in August was the strongest in 13 months, and faster household consumption and an increase in service sector activities were the key drivers. 

 

Europe Indexes and Yields

The DAX index increased by 0.01% to 19,210.19; the CAC-40 index fell by 0.2% to 7,541.59; and the FTSE 100 index declined by 0.1% to 8,237.73. 

The yield on 10-year German bonds edged higher to 2.27%, French bonds inched higher to 3.04%, the UK gilts edged up to 4.24%, and Italian bonds increased to 3.57%.

The euro edged lower to $1.09; the British pound inched higher to $1.31; and the U.S. dollar strengthened to 85.85 Swiss cents.

Brent crude decreased $2.95 to $79.55 a barrel, and the Dutch TTF natural gas rose by €1.55 to €40.06 per MWh. 

 

Europe Stock Movers

GSK plc increased 4.5% to 1,525.0 pence after the British drug maker agreed to settle 80,000 lawsuits in state courts in the U.S. related to Zantac. 

SCOR SE increased 3.2% to €20.60, and the French reinsurance company initiated a discussion to sell its stake in the ninth largest educational publishing company. 

SCOR entered into exclusive negotiations with Huyghens de Participations, the holding company of the Albin Michel group, for the sale of its stake in the capital of Humensis. 

Deutsche Telekom increased 1.5% to €27.16 after the German telephone company said it plans a stock buyback program in 2025. 

BMW decreased 0.2% to €76.60 after the German luxury automobile company reported sales in the third quarter declined, weighed down by the weakness in China. 

Unit sales across all models declined 13% from a year ago in the quarter, driven by a 30% plunge in China. 

Sales across battery-operated and hybrid vehicles stalled at 0.1% after rising at 40% in the corresponding period in 2023. 

Suedzucker AG declined 0.5% to €11.12 after the German company reported a decline in operating results in the second quarter amid high costs and low prices. 

 

 

Yen Drops to Six-Week Low, Producer Price Inflation Accelerates In September 

Tech stocks powered the market rebound in Tokyo in Thursday's trading, tracking gains in overnight trading in New York. 

The Nikkei 225 stock average gained 0.3%, and the broader Topix index advanced 0.2%. 

The yen continued its downward journey to 149.16 against the U.S. dollar and fell to a six-week low as investors lowered their expectations of another rate increase in the near future. 

Producer price inflation in Japan accelerated to 2.8% in September from 2.6% in August, the Bank of Japan reported Thursday. 

The measure of wholesale price inflation was positive for the 43rd month in a row, due mainly to higher prices of basic items, including food staples and rice. 

Rising costs of transportation and fertilizers contributed to inflationary pressures. 

Stock market indexes in Tokyo have been volatile amid rate path uncertainties, elevated geopolitical tensions in the Middle East, and worries about the economic slowdown in China and the U.S. 

The People's Bank of China launched a new lending program worth 500 billion yuan, or $70 billion, that will provide liquidity to qualified brokerage houses, insurance companies, and asset management companies to purchase stocks. 

Investors are hoping that the press conference scheduled by China's finance minister on Saturday may provide clarity on potential broad fiscal reforms. 

Investors are also gearing up for the start of the earnings season starting Friday, and retail stocks were in focus ahead of the release of their quarterly results. 

 

Japan Stock Movers 

The Nikkei 225 Stock Average increased 0.3% to 39,380.89, and the broader Topix index added 0.2% to 2,712.67. 

Mitsubishi UFJ Financial increased 1.6% to ¥1,525.50, Sumitomo Mitsui Financial advanced 1.3% to ¥3,121.0, and Mizuho Financial gained 0.6% to ¥3,018.0. 

Seven & I decreased 0.4% to ¥2,325.0, Fast Retailing Company increased 1.3% to ¥51,360.0, and Isetan Mitsukoshi rose 0.9% to ¥2,355.0. 

Toyota Motor advanced 0.7% to ¥2,581.0, Honda Motor increased 1.4% to ¥1,574.0, and Nissan Motor edged higher 1% to ¥399.80. 

Marubeni Corp. added 1% to ¥2,438.50, Itochu Corp gained 0.7% to ¥7,769.0, and Mitsui & Company added 0.7% to ¥3,256.0. 

 

China Indexes Advanced 3% After PBoC Launched $70 B Swap Facility 

Financial markets in mainland China and Hong Kong rebounded after the central bank launched its lending plan to facilitate liquidity in the stock market. 

The Hang Seng index jumped nearly 4%, and the mainland-focused CSI 300 index advanced as much as 3%. 

The People's Bank of China launched its 500 billion yuan swap plan for "qualified brokerage firms, life insurance, and asset management companies to exchange their bond holdings for Treasury bonds and bills," according to the statement released by the central bank. 

The move is part of the 800 billion yuan plan announced by the central bank a few weeks ago to stabilize financial markets. 

The central bank also plans to facilitate stock buyback plans and stake increases by listed companies and major shareholders. 

Investors are also looking forward to a press conference by Finance Minister Lan Foan on Saturday, and market participants are anticipating the release of new fiscal measures. 

China's stock markets have been volatile over the last four weeks after the People's Bank of China unexpectedly announced monetary measures to increase liquidity in the financial system. 

However, China's top leadership signaled the possibilities of more fiscal measures at a hurriedly scheduled meeting ahead of the start of the Golden Week holiday; however, those expectations have not been met so far. 

The world's second-largest economy is struggling to meet the 5% annual GDP growth target rate set by the top leadership, and many economists have lowered their 2024 growth estimate to 4.6%. 

Financial markets are expected to remain volatile until the government implements measures to revive the residential property market and boost consumer spending. 

Financial markets in Hong Kong are close on Friday for a holiday, and the Hang Seng index decreased nearly 3% in the shortened week of trading.

 

China Stock Movers 

The Hang Seng index increased 3.7% to 21,400.54, and the CSI 300 index advanced 2.4% to 4,051.56. 

Longfor Group increased 7% to HK $13.42, China Vanke increased 7.5% to HK $7.36, and China Resources Land advanced 2.9% to HK $25.90. 

Sun Hung Kai Properties decreased 0.8% to HK $84.95, and New World Development added 1.3% to HK $8.63. 

Life insurance companies traded higher after China's central bank launched swap facilities that could provide additional liquidity to purchase more stocks.

China Life increased 5% to HK $16.50, and Ping An Insurance advanced 6% to HK $51.0. 

Haitong Securities and Goutai Junan Securities jumped the daily limit of 10% in mainland trading after both companies announced a detailed merger plan. 

Both brokerages traded for the first time after being suspended from trading on September 5. 

In Hong Kong, Haitong Securities soared 97% to HK $7.13.