Summary: US equities treaded water yesterday ahead of a pivotal March CPI report today that will provide one of the last few US data points ahead of the Fed’s May 3 FOMC meeting. The market is leaning in favour of one more hike from the Fed in either May or June, to then yield to rate cuts beginning as soon as September. The FOMC minutes from the March 22 meeting will be released later today. Elsewhere, crude oil is poking at the top of the range again, threatening assumptions about the future course of inflation if it breaks higher.
S&P 500 futures had a narrow trading range yesterday with the market waiting for today’s US March CPI report expected to show that headline inflation is coming down, but the real focus should be on the core and services sector inflation. As we have talked about before today’s trading range could be significant if inflation deviates a lot from consensus due to the sizeable zero-days-to-expire options market.
The US dollar is limping into the March CPI release later today, with the EURUSD recovering sharply from its weakness on Monday and now taking aim at the top of the local range at 1.0973, with the psychological 1.1000 objective clearly in mind (highest daily close this year was 1.0990 back in early Feb, with a brief intraday high above the big round figure). Clearly, the market will key off the direction of the CPI surprise, but also any policy hints from the FOMC minutes up several hours later, which should offer a sense of the level of concern that the recent banking turmoil has engendered.
Crude oil prices bounced on Tuesday with Brent trading back above $85, thereby preventing recently established longs from getting under water, a development that could have triggered additional selling towards support in the $80-area. Instead, the market was supported by the weaker dollar and signs that Russian shipments are slowing and a continued halt to pipeline flows to Turkey from the Iraq’s semi-autonomous Kurdistan region. Both prompt spreads in WTI ($0.06/b) and Brent ($0.44/b) have moved into backwardation highlighting a tightening market. The API reported a 0.4-million-barrel increase in US crude stocks while the EIA in its monthly STEO said supply, despite OPEC cuts, would outstrip demand this year and next.
Gold trades higher for a second day and near $2020, supported by renewed dollar weakness on expectations US CPI will show a y-o-y decline to 5.1% from 6% last month. An outcome that will strengthen calls for just one more – if any - rate hike before a succession of cuts begins later this year. The June-December SOFR (Secured overnight financing rate) spread points to a +50-bps rate cut before yearend while the recovery in EURUSD back above 1.09 could see it gunning for the psychological important 1.1000 level. The latest charged was once led by silver, which found additional support from recovering industrial metals. The white metal trades at a one-year high at 25.40 with the XAUXAG ratio declining to 79.50. Gold support at $1970, the 21-DMA, and $1950 while a renewed push above $2032 would signal a return to the March 2022 record high of $2070.
The US 2-year treasury yield held above 4.00% ahead of pivotal US CPI data today as the market continues to lean for one last rate hike in May or June before Fed cuts are priced to begin as soon as September (or arguably December if the Fed fails to make another tightening move first). At the longer end of the curve, the 10-year treasury benchmark edged higher to 3.45% before pulling back after having jumped off margin new lows at 3.25% last Thursday ahead of the US employment report, which was released on a bank holiday Friday.
The NY Fed president and board of governors member John Williams said yesterday that the Fed still has work to do in its fight against inflation and said that the median forecasts in the Fed’s March policy forecasts of one more hike followed by holding rates steady is a “reasonable starting place”, though further action would depend on incoming data. This contrasts with Chicago Fed president Goolsbee (a vote this year) who sounded notes of caution. “Given how uncertainty abounds about where these financial headwinds are going, I think we need to be cautious.” and “We should gather further data and be careful about raising rates too aggressively until we see how much work the headwinds are doing for us in getting down inflation.”
The credit data came in stronger than expected, with new aggregate financing at RMB5,380 billion and new RMB loans at RMB3,890 billion in China. It brings the growth in outstanding aggregate financing to 10.0% Y/Y in March from 9.9% Y/Y in February and outstanding RMB loans to 11.8% Y/Y in March from 11.6% Y/Y in February. One of the bright spots in the March credit data is the RMB 1,245 billion in new loans to the household in March versus the RMB 208 billion in February and the RMB758 billion in March last year. Looking at the breakdown, new medium-to-long-term loans to the household (mainly mortgage) were RMB645 billion in March, much better than RMB86 billion in February and RMB374 billion in March 2022.
The Sweden-based truck maker reports SEK 131.4bn vs est. SEK 118.4bn and the Q1 operating profit was SEK 18.4bn vs est. SEK 12.8bn driven by increasing prices and improving supply chains. The result also underscores the still strong dynamics in global and Europe’s logistic markets.
The Bloomberg Commodity Softs index which includes sugar, cocoa, cotton and coffee jumped 3.2% on Tuesday with gains being led by Arabica’s (KCc1) 4.3% gain to 188.45 cents/lb supported by technical buying after reaching its 200-DMA for the first time since last September. The Raw Sugar contract traded in New York (SBc1) reached a 2016 high while the White Sugar contract in London touched the highest since 2011. Both sweetener contracts being supported by production downgrades in major producing countries, raising the prospects for limited export from key shippers like India as well as Pakistan and Thailand. Also concerns about a short squese ahead of Friday’s expiry of the May White sugar contract (WK2). Cocoa meanwhille rose 2% to $2985 per tons, the highest close since 2016
The US equity market and other assets are showing signs of pent-up volatility ahead of the March CPI report today, one of the final US macro data points that can tilt the odds of the Fed moving ahead with another rate hike at the May 3 meeting or deciding to stand pat, together with the March PCE inflation release on April 28. A significant upside inflation surprise could trigger an S&P 500 move of as much as 100 points in short order, particularly with hedging of popular so-called “0DTE” (zero-day-to-expiry) options driving volatility risks intraday. A large downside inflation surprise could spark a significant knee-jerk move to the upside. Ahead of the release, traders should note that the Bloomberg consensus forecast is looking for the core inflation to rise 0.4% MoM and 5.6% YoY after 5.5% YoY in February. The less important headline is expected at +0.2%/5.1% vs. 6.0% YoY in Feb.
After a rapid rate tightening cycle last year that took the policy rate from 0.25% to 4.50% in the space of just over nine months through the final hike at the meeting this January, the Bank of Canada paused at the March meeting and is expected to hold steady at today’s meeting as well. The forward expectations curve is pricing no further tightening and even marginal odds that the bank cuts rates at some point in the second half of this year, with greater than 50/50 odds of the first cut coming at the October meeting. In the March policy statement, the Bank declared it “will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target.” The next Canadian CPI number is up on April 18 after February showed core inflation rising at a 4.8% clip (versus peak of 5.6% in July of last year.)
Australia’s biggest gold company, Newcrest Mining, received a new sweeter takeover offer from US rival Newmont Corp. The new offer values Newcrest Mining at A$29.4 billion ($19.5 billion). Two months ago, Newcrest rejected Newmont’s $17 billion all-stock takeover offer as the firm said it undervalued the Aussie gold company. If the deal goes again, it will mark the largest gold mining takeover ever, and extend Newmont’s lead over other bullion mining rivals such as Barrick Gold Corp. Moreover, this not only highlights that the world’s appetite for Gold is increasing but shows that Newmont wants to beef up its copper exposure via the takeover. Newcrest is aiming for copper to make up 50% of its revenue by the end of the decade, up from about a quarter now.
The Q1 earnings season starts this week with US banking earnings as the highlight on Friday. S&P 500 12-month forward EPS estimates have been rising since late February by 1.2% suggesting analysts are less worried about credit conditions, the recent banking crisis, and the slowing economy.
Analysts expect JPMorgan Chase to report Q1 net revenue of $39.7bn up 18% y/y and EPS of $3.39 up 21% y/y, but with the recent banking crisis the outlook is more important and especially JPMorgan’s comments about funding costs and loan growth outlook. Delta Air Lines earnings on Thursday are also worth watching for insights into business traveling. Analysts expect Q1 revenue growth of 28% y/y and EBITDA of $1.17bn up from a loss of $282mn a year ago.
This week’s earnings releases:
1230 – US Mar. CPI
1300 – UK Bank of England Governor Bailey to speak
1300 – US Fed’s Barkin (Non-voter this year) to speak
1400 – Canada Bank of Canada Rate Decision
1430 – DoE Weekly Crude Oil and Product Inventories
1700 – US Treasury auctions 10-year T-notes
1800 – US FOMC Minutes
2301 – UK Mar. RICS House Price Balance
0130 – Australia Mar. Employment Change/Unemployment Rate
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy