75 or 100: Has the Federal Reserve's plan been upset by soaring inflation?

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

• S&P 500 - 3,933 (-4.32%)
• NASDAQ - 12,034 (-5.54%)
• CBOE VIX - 27.27
• US 10YR - 3.414%
• USD INDEX - 109.91
• FTSE 100 - 7,386 (-1.17%)
• STOXX 600 - 421.14 (-1.54%)
• UK 10YR - 3.195%
• GOLD - US$1,703/oz
• WTI CRUDE - US$87.67/bbl
• NATURAL GAS - US$8.37/mmBTU
• DALIAN IRON ORE FUTURES - US$101.41/T

THE CALENDAR

US CPI for August clocked in at 0.1% on the headline figure month-on-month, and 0.6% on the core figure month-on-month. That takes the year-on-year figures to 8.3% on the headline, while core inflation rises to 6.3%. Both reads were higher than expected and both stunned the markets who were hoping peak inflation had been reached.

Either way, as some analysts have already pointed out, the figure is most likely just that. The Federal Reserve (now currently in blackout before its interest rate decision next week) has likely made up its mind just based on the general trend of where inflation is and where it's still likely to head.

Tonight, the inflation reads continue around the world with the UK CPI print at 4pm this afternoon then US PPI at 10:30pm. And of course, given inflation is public enemy number one in these times, it's the single biggest thing that will drive interest rate decisions. Speaking of which, there are quite a few happening next week as Bloomberg's David Ingles has dug up:

 

And they say central banks are boring! (Not!)

THE CHART

It's not the most revolutionary chart of all time but it is just worth seeing the landscape from the top down sometimes. Falling inflation is usually better for returns than rising inflation. For the stock market, it’s historically best when inflation is low and declining. What is interesting about this chart is probably the number of months each regime lasts in correlation with inflation. That is, an investment return when inflation is declining does wonders for just about everyone - and can often last a while as well.

THE BROKERS

Following a period of sustained outperformance against the ASX300 mining index, Citi downgrades its rating for South32 (ASX: S32) to neutral from buy. However, they do admit there is still support for its robust valuation. But as is the case with all commodity producers, they are price takers. And falling copper/aluminium prices are not a good sign for a copper and aluminium producer. 

Just as interesting: South32 has six buy or add ratings to its name. Citi's neutral call is the most bearish of them all. Go figure.

And for those of you in the crude oil trade (looking at you Woodside (ASX: WPL), Santos (ASX: STO), Beach Energy (ASX: BPT) shareholders), you may want to read this note from Morgan Stanley. Martijn Rats of the US energy team argues that we have seen the temporary floor for WTI crude oil. Why? 

The oil market's structural outlook remains one of tightness, but for now, this is offset by cyclical demand headwinds. Following the recent correction, and with a slight tightening in our 2023 balance again, we suspect the majority of the decline has now played out. A renewed oil price rally is not imminent as long as macroeconomic conditions remain so weak. 

So no sustained rally for a while, but no reason to believe that it will fall materially further either. That's an acceptable trade-off.... right?

THE TWEET

THE STAT

17.5%: The fall in national petrol prices per litre from early July to September, according to Westpac's survey.

This is as the Westpac Melbourne Institute Index of Consumer Sentiment rose by 3.9% to 84.4. Below 100 is still not good, but the lift is an encouragement nonetheless.

Hans Lee and Sara Allen wrote today's report.