Inflation in the US pushes back rate cut expectations

Inflation data for the US were released in the middle of last week and showed that the headline CPI index rose by 0.4% m/m for March, faster than what markets had been looking for and maintaining its monthly pace from February. Core CPI also came in faster than market estimates, rising by 0.4% m/m and holding to that pace for three months in a row. Super-core inflation, that strips out housing from core services, accelerated to 0.7% m/m from 0.5% in February. Overall, the inflation picture in the US remains hotter than most economists and market participants appear to have hoped for and consequently expectations of when the Federal Reserve starts to cut rates and by how much have been tempered. Options markets are pricing in roughly a 1 in 4 chance of a 25bps cut at the June FOMC meeting.

Consumer sentiment in the US dropped slightly for the April measure of the University of Michigan Consumer Sentiment Index. The headline index fell to 77.9 from 79.4 a month earlier with a measure of current economic sentiment falling to 79.3 from 82.5 for March. Inflation expectations also ticked higher with 1-year inflation expectations rising to 3.1% from 2.9% while longer-term inflation expectations (5 years) rose to 3% from 2.8%.

The ECB kept rates on hold when it met last week, keeping its main refinancing rate at 4.5%, but gave a strong signal that it was preparing to cut rates as “confidence” among policymakers was growing that inflation was “converging to the target in a sustained manner.” ECB president Christine Lagarde also explicitly noted that in June the bank would get more data and an updated economic outlook that could give them room to begin reducing rates. Since the meeting several ECB policymakers have spoken out in favour of a cut by the June meeting.

Economic data from China out in the last week remained disappointing. Headline CPI inflation rose by just 0.1% y/y in March, a substantial slowdown from the 0.7% recorded a month earlier. Consumer goods appear to be largely responsible for the drop in inflationary pressures with food costs falling outright year/year. Elsewhere, trade data for March showed a drop of 7.5% y/y in Chinese exports measured in USD, much weaker than market expectations. Imports also dropped, falling by almost 2% y/y compared with expectations of a 1% increase.

Inflation in India came in at 4.85% y/y for March, slightly cooler than what markets had been expecting. Food costs were the main driver of higher prices with food costs up 8.5% y/y while energy and lighting prices fell 3.2%. Industrial production in India improved last month, rising by 5.7% y/y compared with 3.8% in February.

Today’s Economic Data and Events

• 10:00 KSA CPI March
• 16:30 US retail sales March: forecast 0.5%

Fixed Income

• US Treasury yields pulled lower at the end of the week after a mid-week spike on the hotter than expectation inflation print. Yields on the 2yr UST dropped 6bps on Friday to 4.8966% while the 10yr UST yield fell the same amount to close the week at 4.5216%.
• European bond markets also improved at the end of last week with gilt yields down 6bps while bund yields dropped 10bps to close out at 2.357%.

FX

• The US dollar gained last week as hot inflation and a dovish ECB worked against most peer currencies. At the end of last week EURUSD dropped 0.77% to settle at 1.0643 on Friday while GBPUSD was down 0.8% to 1.2452. USDJPY managed to hold relatively steady at 153.23 but was still more than 1% weaker for the week as a whole.
• Commodity currencies also closed softer on Friday with USDCAD up 0.6% at 1.3775, AUDUSD down 1% at 0.6467 and NZDUSD closing at 0.5943, down 0.9%.

Equities

• Benchmark US equity markets closed weaker at the end of last week with the Dow Jones down 1.2% and the S&P 500 giving up 1.5%. The NASDAQ settled lower by 1.6% while the escalation in geopolitical anxieties over the last few days may prompt more haven seeking.
• European equities closed mixed with the Euro Stoxx down 0.2% on Friday while the FTSE rallied by 0.9%.
• Asian markets closed generally negative with the Hang Seng down more than 2% along with a drop of 0.8% in the CSI while the Nikkei posted a modest gain of 0.2%.

Commodities

• Oil prices pulled higher at the end of last week and will likely receive some near-term support from geopolitical anxieties. Brent futures closed at USD 90.45/b, up 0.8% on Friday, while WTI rose by 0.8% to USD 85.66/b.
• Gold prices also had a strong week as geopolitical fears support the market. Prices ticked moderately lower on Friday, down 1.2% at USD 2,344/troy oz along with dips in silver and platinum prices.
• Industrial metals were moderately higher with aluminium forwards on the LME up 1.6% at USD 2,494/tonne and copper up 1.2% at USD 9,457/tonne.