Early Morning Reid Macro Strategy

Early Morning Reid - Macro Strategy

Key Market Data (Index @ Close // Change) (S&P 500 @ 7805 // -0.02%) (STOXX Europe 600 @ 635 // -0.10%) (iTraxx Crossover @ 314 // +3) (Brent Oil^ @ 106.26 // +0.52%) (10yr Treasury^ @ 5.20 // -2 bp) (10yr Bund @ 3.47 // -1 bp) (Dollar Index^ @ 102.09 // -0.45%) (Further Fed hikes/cuts priced for 2026 @ 27 // 1 bp) (Further ECB hikes/cuts priced for 2026 @ 25 // 0 bp) ^ - Change from previous day's 4:30 GMT to 04:30 GMT

A reminder that to coincide with our DBRI AGI seminar yesterday, Adrian Cox has collaborated with Azeem Azhar for a new piece on all things superintelligence related and whether its arrival by 2030 is realistic and what the bottlenecks might be. You can find it here at the Deutsche Bank Research Institute.

Markets have put in a subdued performance over the last 24 hours, as investors are grappling with various crosscurrents. First, chip stocks sold off yesterday on the back of AI fears, with the Philly semiconductor index (-0.23%) posting a 5th consecutive decline even as the stocks saw an afternoon recovery off the lows. Second, US banks struggled as earnings season got underway. The KBW Banks index closed near the lows of the day down, having fallen -1.39%. And third, inflation fears were still prominent, as the 12-month Brent future (+1.12%) hit a new high for this year of $87.37/bbl. On the plus side French 10yr spreads tightened -4.9bps to bunds. All that before today’s US CPI print, which is expected to be a strong one.

Let's start with US CPI , which occurs just two weeks out from the Fed’s next decision, and a bit of hawkishness has crept back into the market narrative. For instance, market pricing for an October rate hike was back up to 24% yesterday, the highest since October 1, before the underwhelming jobs report (and a day after the initial French stress) led to mounting questions as to whether they actually could deliver back-to-back hikes. But with oil prices still elevated, the speculation has persisted going into the CPI.

This report is likely to be a strong one given the run-up in energy prices over September, and our US economists expect that motor fuel prices were up +9.6% over the month. So they think that would see headline CPI come in at +0.57% on a monthly basis, which would be the strongest month since April, shortly after the Iran conflict began. And in turn, that would take the year-on-year rate back up to +3.6%, its highest since May. To be fair, they think core inflation will be relatively softer, at a monthly pace of just +0.16%, leaving the year-on-year rate at +2.4%. But even so, any surprises either way will help shape the narrative going into the next Fed meeting, as we don’t get the PCE inflation readings (which they officially target) until the day after the next decision.

Federal Reserve Bank of New York President Williams yesterday reiterated his support for another 25bp Fed hike this year, but added that “I don’t think at this time I have any reason to believe that we

would need to do more.” This puts him in line with the median from the September meeting dot plot. Federal Reserve Bank of Richmond President Barkin also spoke yesterday about the need for the Fed to grow more restrictive as he said that “It seems clear to me at this point that these shocks are continuing, and that inflation is enduring, and that doing something about it makes some sense.” He also asserted that the Fed’s goal of 2% was “actually something” that you can hit.

With that backdrop in mind, front-end yields generally moved higher around the world. For instance, the US 2yr Treasury was up +2.1bps on the day to 4.78%, while the 2yr UK yield (+1.7bps) also rose even as 2yr Bunds were unchanged. However, this wasn’t echoed further out the curve, as the risk-off tone put downward pressure at the long end. So the 10yr Treasury yield fell -2.9bps to 5.21%, whilst the 10yr bund yield fell -0.8bps to 3.47%. The one piece of (relative) good news came from France, where the 10yr yield fell -5.8bps to 4.84%, but even that still left the Franco-German 10yr spread at 137bps, clearly above its levels before the stress began a couple of weeks ago.

As all that was going on, it wasn’t…