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North American Morning Briefing : Stock Futures Waver Ahead of Inflation Data, Earnings

10/13/2021 | 06:08am EST

MARKET WRAPS

Watch For:

U.S. CPI for September; BlackRock Inc. 3Q results; JPMorgan Chase & Co. 3Q results.

Opening Call:

Stock futures ticked down ahead of fresh data on consumer prices and the start of earnings season, both of which are expected to provide insight into whether recent concerns about inflation are warranted.

Stocks have been weighed down by fears about inflation in recent days, stoked by rising energy prices and continued bottlenecks in supply chains. Investors are trying to gauge the effect this could have on central bank support for the economy and whether the higher costs for raw materials and energy will erode profits as third-quarter earnings season kicks off.

"Equity markets need to incorporate the higher uncertainty on central banks' approaches and the uncertainties on the earnings side," said Antonio Cavarero, head of investments at Generali Insurance Asset Management. "This doesn't mean the tide has turned, but some higher caution is probably the way to go for the next few weeks."

Data on the consumer price index for September is set to go out at 8:30 a.m. ET. Economists project that inflation remained at an elevated level, boosted by worker shortages and strained supply chains.

"The Fed will be very sensitive to this number. If it comes very far from market expectations, they will have an incentive to prove they are on top of things," Mr. Cavarero said.

Federal Reserve official Raphael Bostic said Tuesday that there was a risk of inflation being more persistent than expected and that he was on board with an imminent pullback in some stimulus measures. The Fed is expected to publish minutes from its last meeting at 2 p.m., providing investors with more insight into policymakers' views.

Several household-name companies are scheduled to report earnings on Wednesday ahead of the opening bell, including JPMorgan, BlackRock and Delta Air Lines.

"Have we passed the point of the sweet spot-low costs and explosive demand, to a point where demand is softening and costs are picking up? We do expect to see some signs of that starting to emerge," said Sebastian Mackay, a multiasset fund manager at Invesco. "I do believe we'll be in a more rocky patch for equities, where they will be moving sideways or possibly down a little bit."

Stocks to Watch:

Apple shares were down in late trading Tuesday, pressured by a Bloomberg report that says the company is "likely" to reduce its iPhone 13 production target by up to 10 million units due to ongoing component shortages.

The article asserts that Apple had expected to produce 90 million new iPhones in the December quarter, but that the company is telling manufacturing partners that the total is now likely to be lower, due to a shortage of components from both Broadcom and Texas Instruments.

Apple never comments on production goals. In response to a query from Barron's, Apple declined to comment on the report, which is sourced to "people with knowledge of the matter."

On a conference call with investors after Apple reported June-quarter financial results, Chief Financial Officer Luca Maestri said that the company expected supply constraints to be worse in the September quarter, with a particular impact on both iPhones and iPads.

In reporting March results, Apple had warned that supply constraints would trim June-quarter sales by between $3 billion and $4 billion, but Maestri said Apple was able to make adjustments and reduce the impact to slightly below the low end of that range.

Forex:

The dollar fell after rising strongly on Tuesday as investors look ahead to U.S. inflation data and the Federal Reserve's meeting minutes later for clues on the central bank's next policy steps.

The DXY dollar index dropped 0.1% to 94.4130 after rising to a one-year high of 94.5610 on Tuesday. A narrowing of the spread between short-term and long-term U.S. Treasury yields on Tuesday allowed the safe-haven dollar to "maintain its upward momentum aided by risk hedging buying ahead of U.S. inflation data tonight and nervousness about growth outlooks in the third quarter earnings season releases," Oanda analyst Jeffrey Halley said.

Sterling was little moved after U.K. economic growth data missed forecasts but could fall later if the figures prompt the market to scale back interest rate rise expectations, Silicon Valley Bank said.

The U.K. economy grew 0.4% month-on-month in August, below the 0.6% growth expected by economists in a WSJ survey. The miss will stoke concerns about slower growth combined with high inflation, or stagflation, Silicon's vice president Sam Cooper said.

"While sterling was largely unchanged in the immediate aftermath, any indication that the miss could cast doubts on expectations for the Bank of England to raise interest rates in the near future will see the pound come under pressure."

Bonds:

The yield on the benchmark 10-year Treasury note held steady at 1.578% Wednesday, from 1.579% Tuesday.

A higher-than-expected increase in consumer prices in the U.S. in September could upset equities and spill into high-yield corporate bonds, said UniCredit.

"An adverse reaction in equities is also likely to adversely affect the high-yield market, which suffered again yesterday," analysts at the bank said. They added that the iBoxx high yield nonfinancial corporate bond index widened five basis points to 295 bps Tuesday, the highest level since March.

In their view, any spread widening in either investment-grade or the high-yield corporate bonds should nonetheless be contained due to a supportive technical backdrop of falling new-bond supply and bond-buying by the European Central Bank. U.S. Sept.

Commodities:

Oil prices stabilized following a report that suggested Iran nuclear talks could recommence as soon as this week, prompting some traders to price in a potential higher supply of crude to the market.

Tempered demand due to the sharp rise in energy prices may also be contributing to the stabilization, according to Mr. Mackay. "We are probably entering the stage where prices have moved up so quickly that we are now getting a demand response, people are reining in spending and that starts to balance the market a little bit," he said.

European benchmark natural gas prices were up 6.6% at EUR91.37 per megawatt hour, with the recent price drivers going nowhere.

The idea of insufficient energy expenditure features prominently in the IEA's World Energy Outlook released early Wednesday, in which the watchdog said that while oil and gas spending was "one of the very few areas that is reasonably well-aligned,"--with the levels necessary for net-zero emissions by 2050--clean-energy spending needs to triple in order to avoid the risk of more energy market turbulence. OPEC's monthly report is due later Wednesday.

Base metals rose across the board after Chinese exports rose at a faster-than-expected pace last month, despite concerns about supply bottlenecks and power shortages.

Three-month copper on the LME was up 0.9% at $9,539.50 a metric ton while aluminum gained 1.3% to $3,107 a ton and nickel rose 1.3% to $19,200 a ton.

China's exports rose 28.1% last month, a quicker pace than in August and more than economists had been expecting, suggesting strong economic activity in the world's second-largest economy. Imports missed expectations, but copper imports rose, snapping five consecutive months of decline and lifting hopes about demand for the red metal.

Gold prices ticked higher ahead of U.S. CPI data which should offer clues into the Fed's plans for tapering and interest rates.

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