US stock markets gapped down at the open this morning (Dow -168 pts; SPX -.5%). All eleven major market sectors are in the red. The worst performing groups are semiconductors and banks. The VIX Index jumped up to 12.6 today. European stock markets are down over 1% and Asia was mostly lower overnight. Commodities are mixed even though the dollar is much stronger today. WTI crude oil is trading back up around $67.60/barrel. Bonds are higher in price, lower in yield today. This is likely due to two factors: Turkey’s growing crisis (see below) and the CPI report (see below). The 10-year Treasury yield dipped to 2.88%.
The financial crisis in Turkey got worse today. President Trump authorized a doubling of the tariff on imported metals from that country. Seems he’s tired of haggling with Recep Erdogan’s government regarding a detained American citizen. Recep tried and apparently failed to reassure everyone that Turkey’s economy is OK (it’s not). He just blamed everything on “artificial financial instability.” So asset prices throughout Turkey are plunging as investors run to the exits. The iShares Turkey ETF (TUR) is down 11% so far this month. And the damage is spreading. European banks have roughly $130bil loaned out to non-bank Turkish companies, and they’re worried about that. Global investors are selling off other emerging markets funds and moving into safe havens (i.e. US Treasuries). And believe it or not, this is affecting the chances of further Fed rate hikes this year. Looking at the fed-funds futures market, the odds of two more hikes in 2018 has fallen to slightly better than even.
The Consumer Price Index (CPI) came in roughly as expected in July. Retail inflation is 2.9% higher than year-ago levels, and that’s the highest rate since early 2012. Core CPI, which excludes food & energy, accelerated a bit to 2.4% y/y growth. That level isn’t scary at all, but the trend is clearly upward. And it needs to be upward, because the economy is very strong. The pace of that trend, however, is the critical factor, and will determine how aggressively the Federal Reserve will hike rates. Bloomberg ran an article positing that CPI is “set to plateau,” and won’t continue rising at the same pace. “A less aggressive inflation profile in the second half of the year will cast doubt on the need for a fourth interest rate increase in December.” Apparently, the bond market came to the same conclusion today, as yields fell.