Rise and shine everyone.

US Interest Rates continue to track higher. The US 10Y Yield is very close to the 4.5% threshold that we have been watching. The idea is that yields could go higher from that level putting pressure on equities. Equities, however, have been ignoring the bond market for now and the focus for this week remains the US CPI Inflation data set to be released tomorrow. (CPI Preview below).

Asian markets mostly traded higher with the Nikkei 225 closing 1.1% higher, with the JPY further weakening. US Equity futures are marginally higher, while Gold remains firmly above 2350. Oil and Bitcoin are pulling back. US Treasury Yields are lower across the board after yesterday’s 2024 high.

US CPI Preview

Tomorrow’s CPI data seems to be getting undue importance. The market is considering this CPI print to be the one that will put a dampener on the Fed cutting rates. I don’t think so. I think the market reacts to it, for sure, but I don’t think that this will deter the Fed’s determination the way people think it might.

Headline inflation should come in higher tomorrow, with energy prices being the main source of the increase. The Fed has discussed time and again that food and energy are volatile categories and they don’t focus on it as much as core inflation. The core number should come in lower. The spike in Used Cars is set to reverse and the Apparel prices have been tracking lower as well. The key concerns remain Shelter Inflation and Insurance, both of which remain sticky.

However, overall, core inflation should come in lower and as long as core PCE ends up at 2.6% (the Fed’s latest target for the year), they are in the clear to cut. Core PCE is currently at 2.8%YoY, as of Feb 2024.

As a reminder, here’s last month’s heat map:

NY Fed Survey - People still expect to lose their jobs

The NY Fed’s Survey had some interesting results yesterday. Inflation expectations didn’t show much of a move, and neither did expectations for a move-in home price. But, one of the most alarming data points was the discussion on jobs:

“The mean perceived probability of losing one’s job in the next 12 months increased by 1.2 percentage points to 15.7%.”

The labor market may not be as resilient as the numbers suggest.

The other interesting data point was around food. Again, while overall inflation expectations didn’t increase, year-ahead expectations for price increases did rise for gas, food, medical care, rent, and even college education.

BoJ’s Ueda speaks before Parliament

BOJ Gov Ueda’s testimony to Parliament reiterated that while the domestic economy showed some weakness it shows signs of recovering moderately. He also discussed:

• The chance of solid wage growth this year was increasing and inflation

• Inflation is likely to exceed 2% this fiscal year and slow thereafter

• Must watch FX, market developments, and their impact on economy and prices.

• BOJ to guide policy appropriately with an eye on the economy, price developments with short-term rates as a policy target

There is some discussion that the BoJ will likely revise their inflation target higher and this should move yields higher to a certain extent.

Meanwhile, the JPY continues to weaken and Japan’s Finance Minister Suzuki reiterated that FX should move stably and reflect fundamentals. They reiterated watching FX with a high sense of urgency.

Chart of the Day

The NFIB Small Business Optimism Index in the US fell for a third consecutive month to 88.5 in March 2024, the lowest since December 2012 and well below forecasts of 90.2. "Business owners continue to manage numerous economic headwinds. Inflation has once again been reported as the top business problem on Main Street and the labor market has only eased slightly".

Other Stories

• ECB Q1 Bank Lending Survey noted that credit standards for firms tightened a little during the quarter; For Q2, EU banks saw tighter credit standards for corporates but no change for households. The dampening impact of the ECB’s interest rate decisions expected over the next six months also extends to overall bank profitability, with a moderately negative contribution from provisioning and impairments **

• South Korea joins the international chip wars with President Yoon announcing multi-billion dollar incentives to attract chip-makers to Korea, following Japanese and US subsidies for domestic and international semiconductor makers including KRW9.4T in AI and AI chips*.*

• Thailand PM Srettha: Continues to call for the Bank of Thailand (BoT) to cut rates tomorrow. On Feb 18, Thailand’s Q4 GDP growth rate came in at -0.6% YoY vs. 0.1% est.

Calendars

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