EQUITIES: S&P E-minis Recovery Suggests Entering Corrective Phase

• The opposite is true for CPI inflation, with core CPI first surprisingly soft in July before ripping higher in August (released Sep 13), seen as locking in a 75bp hike this week and forcing a substantial re-pricing of higher terminal and 2023 rates generally.
• Sequential core CPI inflation bounced from July’s soft 0.31% M/M to 0.57% M/M, sharply unwinding hopes of cooling price pressures with a two-pronged acceleration in goods (limited sign of impact from supply chain easing) and services (both sticky and wage-sensitive alike), with the breadth of pressures driving a new high in monthly median CPI.
• Core goods defied expectations of a cooling on squeezed margins as the rate doubled, while core services saw surprising strength in shelter – a yet new multi-decade high for OER M/M inflation – but also in other wage-sensitive categories such as medical care.
• Having been preceded closely by VC Brainard on wanting to see “several” months of lower inflation and Governor Waller implying perhaps even longer, it essentially reset the clock on how soon the Fed might look to stop aggressively tightening monetary policy.
• Early indicators suggested core PCE bounced to at least 0.41% M/M in August (potentially higher after the PPI details), a quick reversal after July saw the first monthly rate since Mar-2021 below that consistent with the 2% inflation target.

• The combination of the two payrolls reports since the Jul FOMC left an open debate between a 50bp and 75bp hike for the Sept meeting: not strong enough to warrant 75bp in their own right but equally too solid to justify a more dovish pivot (Aug released Sep 2).
• Strong payrolls growth lent support to evidence that the US isn’t already in a recession, adding a rapid 841k jobs in two months and closing the gap to pre-pandemic levels of employment, albeit still notably below in population-adjusted terms.
• However, after signs of a stalling in the recovery of labor supply, including in the July report, participation surged higher in August from year-to-date lows to highs, in turn surprisingly pushing the u/e rate up two tenths to 3.7%.
• It wasn’t a drastic move, coming off joint record lows and where the median FOMC member expects the rate to sit at in Q4, but a larger increase in underemployment and a further drift higher in socio-demographic u/e rate gaps pointed to a modest easing in labor market tightness despite a record 2 job openings for every unemployed.
• Similarly, there was a modest cooling in average hourly earnings growth to a still strong 0.3% M/M, although the Fed is probably more focused on metrics with fewer compositional issues such as the ECI.

Inside session range for Tsys after the bell, curves steeper with short end outperforming all day, Modest volumes (TYZ2<1.1M) going into the weekend (London out for Queen's funeral Mon), FOMC annc Wed (75bp hike widely expected), BoE Thu.

• Trading desks posited large steepener/curve flattener unwinds in play, boosted early volumes. Tsys 2s10s bounces off lowest/inverted levels since mid-August: -47.406 to -40.487, while 5s30s bear steepened to -17.687 high from -22.574 low.
• Earlier UofM preliminary Sept print confirming the larger than expected bounce into Aug. Current conditions small miss, expectations small beat. 1Y inflation expectations as expected, down 20bps to 4.6% for lowest since Sep'21.
• Meanwhile 5-10Y inflation surprisingly dips a tenth to 2.8%, lowest since Jul'21, after two months at 2.9% as it continues to slowly move lower from the June 3.1% peak, but within the range of recent revisions come the final print.
• No obvious headline driver for move to early session low (30YY taps 3.5459% high) in early trade while SPX ratcheted lower as well, ESZ2 marking 3855.25 low by midmorning.
• Current cross-asset levels: Stocks weaker but off lows heading into triple witching expiration w/ESZ2 at 3890.0 (-29.25), Crude firmer (WTI +0.17 at 85.27) as is Gold (1674.78 +9.59).