A look at the day ahead in the U.S. and global markets from Mike Dolan
It may seem like an overreaction to an inflation miss of less than a tenth of a percentage point, but March’s heated consumer price update has led markets to doubt a U.S. rate cut before the November election.
After much concern ahead of the report, the monthly increase in the US CPI was 0.359% – rounded up to 0.4%, compared to the forecast of 0.3%. The rounded expression would have been in line with expectations if the number had been less than one basis point lower.
Certainly, the narrative quickly focused on stubborn rent increases and housing inflation, high insurance costs and the third straight month of a monthly rise in “core” CPI inflation of a rounded 0.4%, putting annual core inflation at 3.8 % remained.
But the market reaction was dramatic – some would say exaggerated. Futures markets have all but killed the chances of a rate cut by the Federal Reserve in June. They see less than a 50% chance of a rate cut in July and now doubt there will be more than one rate cut this year – although Fed policymakers have said there will be as many as three just last year Month.
Minutes of that Fed meeting released later on Wednesday did little to calm sentiment.
Perhaps most clearly for those who follow the political calendar, an initial quarter-point interest rate cut from the Fed will not be fully reflected in futures prices until the Nov. 7 meeting – days after this year’s White House and Congressional elections is expressed.
With the political outlook likely to be difficult for the Fed to make its first rate cut in September, futures contracts then only see a roughly 80% chance of a rate cut.
The CPI news sent Wall Street stock benchmarks down nearly 1% and triggered the biggest one-day rise in two-year Treasury yields and the biggest one-day rise since March last year.
The dollar’s move was exaggerated by the yen breaking through the Bank of Japan’s presumed intervention barriers at around 152 per dollar, hitting its weakest level since 1990 at 153 on Thursday – well with no signs of BOJ buying.
And the fact that despite Fed futures being wiped out, markets still see a 75% chance of a rate cut by the European Central Bank (which meets on Thursday) in June sparked the biggest one-day decline in over a year for the euro/ Dollar from exchange rate too.
The fundamental reasons for the dollar move were pretty clear and it was the biggest daily rise in 10-year Treasury rates since 2022.
It didn’t help that the long end of the Treasury curve saw a week of fresh debt sales. And later Thursday, about $22 billion in 30-year bonds will be up for grabs.
Investors will now turn their attention to Thursday’s producer price report to get a clearer picture of March inflation – looking at the components within it that may provide further clues about how the Fed’s preferred PCE inflation indicator is shaping up .
A number of Fed speakers are being watched like a hawk, perhaps literally.
But whatever you think is the cause of the renewed inflation scare, it’s certainly not happening in China.
Annual consumer inflation in China fell more than expected to just 0.1% in March, while producer price deflation continued, keeping pressure on policymakers there to take further stimulus measures as demand remains weak.
Overall, Wednesday’s market sell-offs appear to calm down somewhat on Thursday. Government bonds were overloaded at the closing prices on Wednesday, although stock futures on Wall Street were already in the red again before trading began – as were the stock exchanges in Asia and Europe beforehand.
More worrying for inflation watchers were geopolitical developments overnight.
Oil prices rose again due to tensions in the Middle East.
German airline Lufthansa extended the suspension of its flights to Tehran on Thursday as the region remains on alert for Iranian retaliation for a suspected Israeli airstrike on the Iranian embassy in Syria.
An Iranian news agency had on the social media platform
The region and the United States have been on guard for a retaliatory attack from Iran since April 1, when Israeli warplanes were suspected of bombing the Iranian embassy compound in Syria.
Markets are also trying to focus on the start of first-quarter earnings season, with a trio of big banks – JPMorgan, Citigroup and Wells Fargo – expected to report results on Friday.
Analysts expect first-quarter total profit to rise 5.0% year over year, according to LSEG data. That’s less than the 7.2% annual profit growth for the quarter it forecast on Jan. 1.
Key diary entries that could guide US markets later on Thursday:
* European Central Bank policy decision and press conference
* US producer price index for March, weekly jobless claims
* Susan Collins, President of the Federal Reserve Bank of Boston, John Williams, President of the New York Fed, Thomas Barkin, Chairman of the Richmond Fed, and Raphael Bostic, Chairman of the Atlanta Fed, speak
* The US Treasury is selling $22 billion in 30-year bonds
* US corporate earnings: Constellation Brands (NYSE:), Carmax, Fastenal (NASDAQ:)
* Eurogroup finance ministers meet in Brussels
(By Mike Dolan, Editing by Christina Fincher, [email protected])