Summary: US equities turned back lower and closed down on the session after trying to rally in the wake of the March US CPI report as treasury yields chopped aimlessly. The US dollar slumped, with EURUSD testing above 1.1000 for the first time since February and GBPUSD eyeing the 1.2500 level. Oil prices rose sharply and cleared local resistance after the recent OPEC+ production cut.
US equities jumped higher on the slightly softer-than-expected March CPI headline, but then chopped back lower as a dip in Treasury yields failed to sustain. The Nasdaq 100 index underperformed the broader market, dipping over 100 points to close at a two-week low near the 21-day moving average just below 13,000. The S&P 500 closed less than a half-percent lower and within the recent range, although the reversal from the intraday jump looks ugly (with intraday volatility likely aggravated by zero-day-to-expiry option trading over the US CPI release.
The US dollar chopped around in the wake of the March US CPI release, which failed to provide any surprise in the core data (more below), but ended the day lower as EURUSD tested above 1.1000 for only the second time in the last year, and GBPUSD approached important cycle resistance near 1.2500. Fed hike expectations/probabilities for the coming two meetings edged ever so slightly lower. Overnight, the Aussie got a lift from stronger than expected March employment data, with a second month in a row of strong full time payrolls growth as the unemployment rate remained pinned near the cycle low at 3.5%.
Brent Crude oil prices surged above $87/barrel for the first time since January, breaking free of the local resistance after the prior surge on OPEC+ announcing a production cut the weekend before last. Lower exports from Russian ports last week have been in focus in recent days, and a disruption of a pipeline supplies in Iraqi Kurdistan may also have weighed. The WTI crude oil contract cleared $83/barrel overnight for the first time since December. OPEC will issue it monthly report today.
The US CPI report (see below) didn’t generate a sufficiently large surprise to serve as a major catalyst for gold prices, which tried to surge on the initial dip in US treasury yields and the US dollar before chopping back lower and then ending the day only slightly higher and still below the recent 2,032 high, with the 2,000 level maintaining as the USD remains on its back foot. Silver managed to hold its new gains slightly better, staying well above $25/oz after the choppy reception of the US CPI data.
US treasury market reaction to the March CPI data (see below) was mixed, with a sharp rally yielding to a choppy retracement and the 2-year this morning only coming in a few basis points lower at 3.98% after a dip to 3.87% after the CPI data yesterday. The longer-end of the US yield curve underperformed and the results from the 10-year auction were poor with notes being awarded at 2bps cheaper than the when-issue trading level as of the deadline of the auction. The yield on the 10-year notes closed 4bps lower at 3.39%. The 2-10-year yield curve steepened by 4bps to -57.
The market noted that US March headline CPI came in slightly cooler-than-expected while the core numbers were in-line with expectations. Headline CPI M/M cooled to 0.1% (exp. 0.2%, prev. 0.4%), while the annual pace slowed to 5.0% (prev. 6.0%, exp. 5.1%); core M/M rose 0.4% (prev. 0.5%, exp. 0.4%) and Y/Y 5.6% (prev. 5.5%, exp. 5.6%). The initial reaction was dovish as equity market futures rallied and Fed pricing for a May rate hike tumbled but the reaction was later mostly reversed. Fed futures are still pricing in a 70% probability of a 25bps rate hike in May with about 65bps rate cuts (from an assumed hike) then priced in for the rest of the year. The drag on inflation has chiefly come from a slight deceleration in the rise in shelter prices and sharply lower energy and used car prices.
The FOMC minutes showed that members are divided on the outlook, with some emphasizing the need to be flexible as growth risks have increased while others still worried about upside risks to inflation. Still, the committee leaned towards another rate hike after the March meeting, even though concerns of a credit crunch did weigh on the outlook and Fed staff advisers forecasting a “mild recession” later this year. The banking sector concerns have cooled further since the meeting, and CPI and jobs data have remained firm, sustaining expectations that the Fed may not yet have peaked rates for the cycle, although the 18-month forward assumption is that the Fed will cut some 150 basis points from the current level.
The Bank of Canada left rates unchanged at 4.5% as expected whilst maintaining language it is prepared to do more on rates if needed to bring inflation back to target. The average GDP forecasts were revised higher for 2023, but down for 2024, while the 2025 growth is seen picking up to 2.5%. On inflation, the 2023 average CPI forecast was revised lower to 3.5% from 3.6%, while 2024 was left unchanged at 2.3% with 2025 inflation seen at 2.1%. Commentary included some pushback on the pricing of rate cuts for this year, but it wasn’t enough to change the market pricing. USDCAD trades just above the 200-day moving average and the near the local pivot low of 1.3407.
China reported a 14.8% YoY gain in exports in USD terms, the first time exports rose in six months, in part on the clearing of disruptions from the country’s former zero-tolerance policy on Covid. The strong surge was a surprise to consensus expectations of a –7% fall. With imports falling slightly YoY, the Trade Balance hit a huge surplus of $88.2 billion.
The European luxury retailer reported a strong surge in Q1 sales, led by fashion and leather goods rising 18%, nearly twice the pace of growth expected from analysts. The company reported strong growth in sales in Asia after China lifted Covid restrictions. The American depository receipts surged 3.4% on the news yesterday.
The company reported Q1 profits of EUR 1.93 billion, handily beating expectations of EUR 1.78 billion, although still a drop of 32% versus a year ago. Sales also beat expectations despite cutbacks of production for some of its more energy-intensive products
The US March CPI data yesterday offered little to shift expectations for the May 3 FOMC meeting as the market still leans for perhaps one more Fed rate hike there, followed by rate cuts to begin as soon as September. Ahead of the May 3 FOMC meeting, we will get three more weekly initial jobless claims prints, starting with today’s, the March PPI also out today, and the Retail Sales report Friday. The Fed’s favoured inflation gauge, the PCE inflation data, will be out on April 28 (looking sticky at 4.6% in February after the two prior readings were within 0.1% of that number. The March Fed forecasts see PCE core dropping to 3.6% by the end of this year). We will have a look at both the ISM Manufacturing (May 1) and ISM Services survey (May 3) ahead of the Fed’s decision.
The Q1 earnings season kick-off on Friday is dead ahead, as three of the largest US banks are set to report. S&P 500 12-month forward EPS estimates have risen 1.2% since late February, 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 today are also worth watching for insights into business traveling, the airlines’ most profitable segment. 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:
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Commodity Strategy
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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
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Head of Commodity Strategy