Retail earnings unable to boost stocks, UK inflation hits highest level since 2011, Target earnings, Mixed Housing data, Oil drops, Gold rises, Bitcoin hovers ~$60K
Decent retail earnings were unable to send US stocks back into a record setting mode as cost pressures remain elevated for the foreseeable future. The S&P 500 index looks like it is going to be stuck in a range until investors feel confident that the Fed didn’t make a policy mistake and won’t be forced to raise rates sooner.
Another round of Fed speak from Williams, Waller, and Mester did not provide any shifts over where the board stands on inflation.
It wasn’t pretty, but the 20-year auction performed better than last week’s disappointing 30-year sale. The 10-year Treasury yield dipped to session lows after the decent 20-year sale, down 3.3 basis points to 1.601%.
The British pound was the second strongest currency next to yen as pressure for BOE tightening grew after UK inflation hit the highest levels in a decade. Inflation is getting worse for the UK and given their inability to store gas, the economy is extremely vulnerable to surging natural gas prices. Inflation expectations are for higher prices over the coming months so that should raise expectations for a December rate hike by the BOE.
The bar may have been too high for big-box retailers. Target delivered decent results but fell short of impressing the street. Target posted a 20-cent earnings beat, better-than-expected revenue by a billion dollars. Third quarter operating margin came in at 7.8%, lower than the 8.5% seen a year ago.
Walmart and Target have had good runs since March, but margin pressure is only going to get worse over these next few months and that has some investors rotating out of retail despite what is expected to be a very strong holiday season.
Housing starts unexpectedly dipped in October, but the market still remains strong as building permits increase 4.0% to 1.650 million units. US homebuilding is still battling higher material costs and labor shortages. Demand is still strong for homes despite elevated lumber and copper prices. If Treasury yields continue to rise, that could be the catalyst to cool the hot housing market.
A potential coordinated effort between the world’s two largest economies to release crude reserves sent oil prices lower. The Biden administration asked China to release oil reserves and it appears Beijing is considering it.
Despite a mostly bullish EIA crude oil inventory report, crude prices are drifting lower. A surprise draw of 2.1 million barrels, a dip in production, and steady gasoline demand was unable to trigger a substantial recovery in prices. The 2.1 million barrel draw countered last night’s API data of 655,000 build and today’s consensus estimate of a 1.2 million increase.
Inflationary pressures are heating up everywhere and that has some investors nervous about the short-term growth outlook which could also translate to softer crude demand.
If the US and China are unable to reach a quick agreement on a coordinated reserve release, WTI crude should quickly recover to the $80 level. A formal announcement could trigger further selling momentum for WTI crude that targets the $74 area.
Gold prices got a boost from hot inflation data from Europe and as the Fed sticks to the wait-and-see approach on whether they are wrong about inflation being transitory. UK inflation has now been above the BOE target for a third straight month and has hit the highest annual pace since 2011. Eurozone inflation was confirmed at 4.1%, a 13-year high that still has yet to faze the ECB.
Gold may consolidate here a little while longer before making a run towards the $1900 level.
Bitcoin continues to consolidate around the $60,000 level as other parts of the cryptocurrency world grapple with the SEC probes. BlockFi and other high-yielding crypto accounts may seem to be good to be true for many on Wall Street. Given cryptocurrency performance dominance over the past few years, several lending products have provided very lucrative products that will likely go through the ringer.
Bitcoin’s long-term outlook remains bullish, but the waters over the next few months will be rough as institutional investors look to see if the Fed will be forced to raise rates sooner and trigger a broad-based selloff of risky assets that include Bitcoin.
This commentary is provided by Edward Moya Senior Market Analyst, The Americas, OANDA