Market wrap: US CPI drives rates lower and dollar down fell 0.5% on knee-jerk - Westpac

Analysts at Westpac offered a market wra for the US close.

Key Quotes:

"Global market sentiment: A disappointing US inflation report caused bond yields and the US dollar to fall. US equities made fresh record highs.

Interest rates: US 10yr treasury yields fell from 2.33% to 2.27% following the US CPI release, while 2yr yields fell from 1.52% to 1.49%, and 10yr break-even inflation fell from 1.90% to 1.86%. Fed fund futures yields slipped, now pricing the chance of a December rate hike at 83%.

Currencies: The US dollar index fell 0.5% after the CPI data, but recovered to finish the day net unchanged. Underperformer EUR initially jumped from 1.1810 to 1.1874 in response to the US CPI data, but later reversed all the gains. USD/JPY fell from 112.25 to 111.71. Outperformer AUD jumped from 0.7825 to 0.7897. NZD jumped from 0.7130 to 0.7197. AUD/NZD ranged between 1.0960 and 1.0990, before rising to 1.1004 at the day’s end (iron ore rose 4.1%).

Economic Wrap

US CPI rose 0.5% in Sep (vs 0.6% expected), the core measure only 0.1% (vs 0.2% expected) for an annual pace pf 1.7%. That was despite a large gain in energy prices (hurricane related), with housing, medical costs and apparel all soft. Retail sales rose 1.6% in Sep (vs 1.7% expected), although the ex-food and energy core measure at 0.5% beat expectations (0.4%), and there were positive back-revisions. Consumer sentiment (Michigan Univ.) rose from 95.1 to 101.1. The 5-10yr inflation expectation component slipped from 2.5% to 2.4%.

Fed commentary came from Kaplan – gradual rate hikes are favoured, with the neutral rate seen at 2.5%; Rosengren – advocates rate hikes given low unemployment; and Evans – the economy is strong but the priority is for inflation to rise to 2%.

Event Risk

China: Sep CPI annual inflation is expected to fall to 1.6%yr from a 7 month high of 1.8%yr In Aug. Consistent with global themes, China’s consumer goods prices are tracking at 1.0%yr, which is slower than services inflation of 3.1%yr.

Euro Area: Aug trade balance is expected to post another monthly surplus of €23.3bn, with exports and imports up over 2017 on higher global trade."