Rise and shine everyone.

US Equity markets took quite the beating yesterday after a hotter-than-expected CPI reading. Three hot readings and the market is seeing this as a re-acceleration trend, lowering expectations for Fed rate cuts this year. The Fed Funds Futures is now pricing in 1.5 cuts for the year, pushing the first cut out to September.

The 10Y Yield crossed the 4.5% mark and the 2Y came very close to crossing the 5% mark, putting enormous pressure on equities, particularly small caps and rate-sensitive sections, such as REITs, regional banks, and utilities.

REITs had the worst performance yesterday, with only Energy ending in green, after oil spiked on news of further retaliation from Iran against Israel. The conflict in the Middle East is on the verge of further escalation, and we could be looking at $100/barrel Brent Crude prices.

But, it wasn’t just US Yields that spiked. Yields in Japan rose to the highest level since 2009, with the Yen weakening further against the US Dollar; the USD/JPY hit 153.30. Asian markets in general traded lower this morning, with the Kospi (South Korea) opening -1.5% lower, with the added pressure of election results out of Korea overnight, where President Yoon’s ruling party suffered heavy defeats in national assembly representation to fall to minority status. 

US Equity Futures continue to trade lower this morning. Gold has recovered marginally, while Oil Prices are off their overnight highs. Yields on the long end continue to inch higher with the US dollar index firmly above 105.

US - CPI, FOMC Minutes and upcoming PPI

As expected the major driver of Headline CPI was a spike in energy prices. Food inflation remained steady, but not decelerating. Core CPI came in at 3.8%, overall unchanged from last month but, still not a great sign. While Vehicle prices decelerated, Auto insurance increased by +22%! There’s definitely reason to be concerned here, and the question remains whether this actually deters the Fed from cutting rates.

FOMC Minutes didn’t bring any surprises. There was more of the same… rate cuts would be appropriate only if there was sufficient evidence that inflation was moving towards 2%. There were concerns related to the banking sector, particularly regarding the exposures of regional banks to commercial real estate. The credit quality in sectors like commercial real estate and credit cards was noted to have deteriorated further.

Perhaps the most interesting point made was that they agreed that when appropriate, they would favor reducing QT by half, without adjusting the cap for MBS. That would bring the Treasury run-off down to $30B per month, and keep the MBS at $35B, i.e., overall $65B from $95B.

Finally, we have US PPI data out at 8:30am and all eyes will be on whether we’re seeing a confirmation of an upward trend there as well.

ECB Rate Decision Today at 8:15 am ET - Preview

The stage is set for a boring ECB meeting. A rate cut is not expected at this meeting and the first cut will likely be reconfirmed for June. That’s the language we will be looking for - that June is the definite date, which is the next meeting after today.

The Bank Lending Survey, however, recently suggested that the transmission mechanism is working with lower demand and supply for credit and President Lagarde’s last speech actually hinted towards being in the dialing back phase.

Most analysts expect three to four 25-bps rate cuts this year from the ECB but it’s unlikely that we will get further guidance on where the rates are headed this year… “data-dependent” will continue to be the mantra, mainly because there is a threat of inflation seeing upward pressure again.

While inflation has decelerated remarkably in the Euro Area, mainly due to the negative drag from natural gas prices, higher oil prices still remain somewhat of a concern. The bigger concern, however, continues to be wages and unit labor costs. Early indications of the forward wage tracker show a decline, with the official data to be released only in May.

With the ECB set to cut rates, and the market pricing in higher-for-longer for the US, the spread between the German 10Y Bund Yield and the US 10Y is now the highest since Jan 2020, and the EUR/USD will come under pressure.

China - Inflation comes in positive again but doesn’t look sustainable

Inflation in China printed a positive reading for a second month in a row, at 0.1% YoY, coming in lower than the expected 0.4% though. Food prices have started to fall again and it doesn’t seem like inflation will remain sustainable.

Base effects favor inflation here but, the PPI reading is telling us a different story. Factory-gate prices fell for the 18th consecutive month, marking the sharpest decline since the previous November and underscoring the ongoing weak demand that signals a need for renewed economic stimulus.

Deposit rates are being lowered at small to mid-sized banks to deter saving and the government has further instructed banks to stop offering interest rates on deposits above the deposit rate ceiling. This is an attempt to boost consumption by making savings less attractive.

Meanwhile, Goldman Sachs upgraded its forecast for China's economic growth in 2024 to 5.0% from 4.8%. based on manufacturing strength. China will further be focusing on more sophisticated manufacturing, setting up systems and boosting credit support for the green sector in the next 5 years.

Other Stories

• Bank of Canada leaves rates unchanged at 5%, as expected

• Bank of England (BOE) Megan Greene: Markets must stop comparing UK and the US; UK rate cuts should still be a way off - FT Op Ed

• KKR Discloses DOJ probe into the adequacy of its previous filings; DOJ reportedly scrutinizing Private Equity merger disclosures

• US MBA Mortgage Applications w/e Apr 5th: +0.1% v -0.6% prior

• BofA Mar credit & debit card spending per household +0.3% y/y v +2.9% y/y prior; Spending softened in March, but continued wage growth, tax refunds, and easing rent inflation should support consumer momentum

• Bank of England (BoE) Quarterly Bank Liabilities/Credit Conditions Surveys noted that lenders reported that the availability of secured credit to households increased in the three months to end-February 2024 and was expected to increase over the next three months to end-May 2024. Lenders reported that total funding volumes decreased in the three months to end-February 2024 and was expected to increase in the three months to end-May 2024

Calendars

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