Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of FX Strategy
The US April CPI came in-line with consensus, helping to ease concerns after three months of inflation overshoot.
This was a relief for markets and fuelled a dovish reaction across asset classes. Equities surged, UST yields tumbled across the curve, and the USD slumped. Market has now priced in a September rate cut from the Fed, with a second rate cut fully priced in for December.
While there are positive signs, significant challenges remain, and the Federal Reserve's ongoing battle with inflation is not yet over. The FOMC members have been focusing on 3- and 6-month annualised inflation metrics as a more accurate gauge of underlying price pressures, and these did not spell an all-clear message for the Fed.
Supercore metrics were also not as positive, coming in at 4.9% YoY from 4.8% prior. Disinflation was primarily goods-driven, with core services inflation still high at 5.3% YoY in April. Rental inflation also still remained sticky with shelter prices up 0.4% MoM for a third straight month.
More importantly, one month of softer inflation is not a trend, and the Fed will have to wait for more readings to confirm that the disinflation is intact before cutting rates.
To top it all, commodities are rallying hard. Despite the recent cooling, oil prices are up 10% YTD. Copper is up 27% and even agri commodities are rising now amid weather concerns. This does not appear to be an environment that spells all-clear on inflation and a green signal on Fed cutting rates.
There has been a spate of weaker US data over the last few weeks, none of it still signalling that we may be looking at a recession, but still fading the US exceptionalism story amid super-long positioning as we highlighted in the Q2 FX outlook. Let’s take stock of some of the key data points:
More importantly, US labor data has started to signal weakness
For now, Fed rate cuts are getting priced in because of disinflation hopes. But with disinflation baked into market’s expectations, focus could shift more towards the growth side.
Let’s consider four scenarios from here, and the risk-reward is tilted towards a more cautious positioning.
Recent FX articles and podcasts:
Recent Macro articles and podcasts:
Weekly FX Chartbooks:
FX 101 Series:
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)