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MARKETS

US stocks are trading higher again on the back of a generally strong start to earnings season, and yet another move lower in rates as the markets increasingly believe the Federal Reserve has delivered an inflation knockout blow in the wake of another market-friendly inflation report (PPI)

And the even better news is the factors causing inflation to fall look likely to be softer still in the coming months, and the policy implications bring welcome relief to several corners of the market. 

Following a benign CPI release Wednesday, the June PPI release was softer than expected. While investors paused to think about the lower-than-expected initial jobless claims, given how noisy the weekly jobless data is, the softer inflation print dominated the market reaction. As a result, both bond and stock prices traded higher again overnight, consistent with the ongoing shift to the soft landing narrative.

Indeed the back-to-back softer inflation prints have further convinced traders that the Fed is topping out this month as thoughts of a September hike get blotted out. As a result, after numerous fits and starts, the door appears wide open for global investors to strap on those peak Fed trades. 

Markets also kicked off the 2Q23 earnings season with results from PEP, DAL, CTAS, and CAG -- and while the stock reaction is mixed, the fundamental results did appear to come in pretty firm illustrative of sustained firm consumer demand.

CHINA

The slowdown in China's growth momentum has led the government to signal a possible introduction of stimulus soon. And it couldn’t come at a more effective time than now with the market pricing in a one-and-done Fed.

The first order of trades should see an improvement in regional growth FX especially given that this Fed peak is coming against a backdrop of disinflation driven by improving supply rather than an unhealthy adjustment to the demand function.

FOREX 

Besides higher stocks, the weaker US dollar trade has seen the clearest expression of peak Fed.

With the yen having initially led the USD weaker story, mostly on a squeeze of JPY-financed carry trades, the EUR is acting as the USD's antithesis and, not unusually, pulling other currencies toward USD weakness.

For some weeks now, which coincided with the hedge fund community build-up of US dollar shorts, numerous underlying measures of CPI have been quickly rolling over, specifically around used car prices and shelter. And by all counts, encouraging more US dollars shorts to build these areas will likely improve further in the coming months.

OIL

( Opinion)

Due to Saudi Arabia's voluntary production cuts, the price of Russian crude oil has risen above a price cap set by the Group of Seven Nations. While this is the first real test of the price cap sanction, I believe this is a political firestorm in the making.

Still, few, if any, importing nations want to pay higher oil prices, especially China; given that policymakers are trying to stimulate the economy and even be willing to offer an olive branch to the West to help mend ties, now would be the perfect time for China to release barrels from strategic petroleum reserves to take some of the heat out of the oil market rally.

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