Friday, Oct 13, 2023

a market overreaction, a stablecoin bust, walled gardens

Hello everyone! Not that I’m superstitious or anything, and anyway, where I live for some reason it’s Tuesday the 13th that is supposed to bring bad luck, BUT just in case, be careful out there today.

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IN THIS NEWSLETTER:

• A market overreaction

• A stablecoin bust

• The missed opportunity in tokenized collateral

WHAT I’M WATCHING:

A market overreaction

So, that was strange. The US CPI data for September yesterday came in pretty much in line with expectations. The headline figure was up 3.7% year-on-year, the same as in August. This was slightly above the average forecast of 3.6%. Month-on-month we saw a deceleration, to 0.4% from 0.6%, again slightly above expectations of 0.3%. Core inflation came in bang in line, with a year-on-year increase of 4.1%, down from August’s 4.3%.

And yet the market did not like it at all. Bond yields jumped and continued climbing throughout the rest of the day. Stocks closed way down, despite having clawed back some of the day’s losses.

(chart via TradingView)

Why it matters:

The inflation data was really not bad. Most of the strength came from the housing component, which always works on a lag. Core inflation rose by the smallest amount in two years. Core goods prices, which exclude services as well as food and energy, fell 0.4%. Overall, the data showed good news.

True, there are some significant details to worry about. Excluding housing and energy, services prices climbed 0.6% from August, the most in a year. But the year-on-year increase decelerated to 3.9%.

US inflation is obviously still far from the Fed’s target of 2%. But it is not showing as much of an uptick yet as I had expected, given the rise in energy costs. And it certainly didn’t seem to warrant such a pessimistic market reaction.