Rise and shine everyone.

It’s been a tough start to April for US equities. US Treasury yields are inching higher, causing the Yield Curve to steepen. The last few days have been splattered with news of the Fed being in no rush to cut rates pushing the probability of the first rate cut higher in July. The market is now pricing in less than 3 rate cuts for 2024. Add to that higher inflation and a stronger economy, and bond yields are pricing that into the long end of the curve.

The markets are not taking this too well. And this week’s unemployment report will certainly be one to watch on Friday. We also have earnings season starting in two weeks, with the banks reporting on 12 April. The buyback window has now closed so companies are in the blackout period.

In other sad news, Taiwan was hit by a 7.2 magnitude earthquake, the strongest the country has seen in 25 years. Over 800 injuries have been reported and the death toll is still being confirmed. Tsunami warnings have gone out. Taiwan Semi evacuated some of their factories but they seem to have strong operational recovery capabilities. Keep an eye on the semis today.

ECB June Cut all but confirmed

Inflation in the Euro Area came in lower than expected at 2.4% YoY at the Headline level compared to 2.6% expected and previous. Core inflation declined to 2.9% from 3.1%, and came in below the consensus of 3%. German inflation yesterday also came in lower at 2.2% down from 2.5% YoY.

With inflation trending in the right direction, the first rate cut is most likely confirmed for June now. The next meeting is next week, April 11, and we’re likely to get further confirmation then.

I was asked on Twitter - what if oil prices go to $100? Well, that certainly is a concern. But, the Euro Area is more sensitive to Natural Gas prices - more specifically, Dutch TTF, which is nowhere close to the levels we saw back in 2022.

The bigger issue here is the wage growth, which has remained sticky for a while. We saw good progress at the end of 2023, with YoY growth declining to 3.1% from 5.2%.

Türkiye’s Inflation Dilemma

In contrast to the EA, inflation numbers released in Türkiye today are certainly not comforting. Headline YoY inflation increased to 68.5% from 67.07%. MoM inflation decelerated marginally.

Last month, the Turkish Central Bank did a surprise hike to increase their policy rate to 50% ahead of local elections to ease tensions in the country about the rising level of inflation that they’ve been experiencing again since Q3, 2023. Looks like the move didn’t work, and the ruling party lost the local elections. While the party and President Erdogan still remain in power until 2028, this is definitely a blow to their power and has implications for fiscal policy.

With the elections behind them, does it still mean that the Central Bank continues on a hawkish path? We will just have to wait and see.

The country also saw significant capital outflows in the last two quarters, and some of that was due to the uncertainty surrounding the elections. We're likely to see a bit more stability going forward and support for the Turkish Lira, which will also help curb inflation.

Other Stories

• Fed's Daly (voter) noted that three rate cuts in 2024 was reasonable baseline forecast; Projection of 3 rate cuts was not a promise

• Fed's Mester (voter noted that the bigger risk to policy was Fed cuts interest rates too soon; Did not see need to cut interest rates at next Fed meeting. If economy evolved as expected Fed could cut rates later this year. Believed 3 rate cuts for 2024 was still a reasonable forecast, but it was a close call

• Chile Central Bank (BCCH) cut the Overnight Rate Target by 75bps to 6.50% (as expected) for its 6th straight cut in the current easing cycle. Board to continue to cut rates with size and timing being data-dependent

• US canceled plan to buy 3M barrels for oil reserve amid high prices

• OPEC ministerial panel reportedly unlikely to recommend any oil output policy changes at a meeting on Wed, Apr 3rd

• South Africa Central Bank (SARB) Gov Kganyago stated that was discussing lowering the inflation target from its current range of 3% to 6% with Treasury Dept. Would not pre-commit on path for interest rates believing that forward guidance is not a useful tool

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)