LIVE MARKETS-CPI rally: to fade or not to fade?
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CPI RALLY: TO FADE OR NOT TO FADE?
Global equities welcomed Tuesday's U.S. inflation report, with major indexes in the U.S. and Japan reaching fresh record highs on heightened expectations that the Fed will lower borrowing costs in September.
Gavekal Research chief U.S. economist Will Denyer believes there are four reasons to fade the rally in stocks, at least temporarily.
Firstly, Denyer believes the details in the CPI report were "not all good", with core goods inflation accelerating from 0.9% to 1.5% and core service inflation (supercore) accelerating to 3.9%.
"If core and supercore inflation do not roll over in August's CPI release, which precedes the Fed's September 17 meeting, policymakers are going to have a lively debate about whether inflation and growth data truly support a rate cut," Denyer says.
Secondly, Denyer notes other key data points have been soft, and may get softer, citing the recent drop in ISM manufacturing PMI.
Thirdly, Denyer says equities are expensive and overbought, meaning the market is vulnerable to a near-term pullback.
Finally, Denyer says the Treasury is draining liquidity.
"After the One Big Beautiful Bill Act lifted the debt ceiling, the Treasury was free to borrow money from the private sector to replenish its cash hoard," Denyer writes.
"So far this liquidity drain has not obviously weighed on equity markets. Although with the Treasury still looking to raise another $200bn, the risk remains."
All things considered, Denyer believes there is a case to fade the rally until some of these questions are answered.
"It seems wise to take at least some equity exposure off the table," Denyer says.
"A lot of good news is priced in, with little weight given to the risks outlined here."
(Samuel Indyk)
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EARLIER LIVE MARKETS POSTS:
DEFENCE STOCKS LEAD EUROPE HIGHER CLICK HERE
EUROPE BEFORE THE BELL: STOCKS SET FOR FIRMER OPEN CLICK HERE
STOCK MARKETS CELEBRATE MILD INFLATION DATA CLICK HERE
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