US inflation hits new 40 year high

• US inflation reached a new 40-year high in March, rising 1.2% m/m and 8.5% y/y, broadly in line with forecasts.  Higher energy costs accounted for half of the March m/m increase and were up 11.0% m/m and 32% y/y. Food prices also increased sharply, up 8.8% y/y. Core inflation came in slightly lower than expected at 0.3% m/m and 6.5% y/y, but was still fractionally higher than in February. Used car prices fell for the second month in a row, and by a substantial -3.8% m/m, which helped to offset higher housing, transport and other services costs. With oil prices lower in April than in March, and base effects expected to become more favourable going forward, the consensus view is that US inflation has likely peaked. However, the decline is likely to be slow, with headline CPI still expected to be significantly higher than the Fed’s 2% goal by the end of this year.   
• Fed presidents Barkin and Brainard both indicated that the Fed will look to move the benchmark rate to a more neutral level – estimated at around 2.5% - this year, which implies a relatively fast pace of tightening. Brainard expects slower global growth, reduced fiscal stimulus and tighter financial conditions to dampen demand as labour force participation continues to recover. We expect the FOMC to raise the Fed Funds rate by 50bp and announce the start of quantitative tightening at the May meeting.
• In the UK the unemployment rate declined to 3.8% in the three months to February as jobless claims declined and average weekly earnings growth accelerated to 5.4% y/y from 4.8% in January.  Job growth in March slowed sharply from February’s 174k however, rising just 35k despite a record 1.3mn vacancies in Q1 22. The Bank of England is expected to raise rates again in May.
• The German ZEW survey showed a deterioration in both the current situation and the expectations index in April, although the decline was less severe than expected. Investors are concerned that inflation, which reached 7.5% y/y in March, will weigh on growth. The expectations index is the lowest since the early stages of the Covid-19 pandemic.

Today’s Economic Data and Events

10:00 UK CPI (Mar) forecast 0.8% m/m and 6.7% y/y

16:30 US PPI (Mar) forecast 1.1% m/m and 10.6% y/y

18:00 Bank of Canada rate decision; forecast 50bp increase to 1.00%

Fixed Income

• US Treasury markets focused on the relative deceleration in core CPI in March (see Macro above) and actually rallied on the release of the inflation numbers, even as headline price growth was at its fastest level in more than 40 years. Yields on the front end of the curve came off heavily with the 2yr down 9bps at 2.4054% while the 10yr yield fell 6bps to 2.7213%.
• Fed governor Lael Brainerd said overnight that the Fed will tighten policy “expeditiously” and “methodically” through rate hikes and running down the balance sheet. Meanwhile Richmond Fed president Thomas Barkin said the Fed should get to a neutral policy stance “rapidly.”
• With the diplomatic conditions around the war in Ukraine darkening, investors moved to havens in European markets overnight with bonds generally rising. Yields on the 10yr bund pulled back slightly, down 3bps to 0.785% while the 10yr gilt dropped by 4bps to 1.8%.
• Emerging market bonds were more mixed with some gains in emerging European bonds offset by declines elsewhere. South African yields were modestly higher while Indian 10yr yields moved higher by 4bps. Sri Lanka warned markets that will default on its international bond payments to focus spending on domestic requirements instead: Sri Lanka’s USD bond maturing in July this year has fallen to less than 50 cents on the dollar.
• S&P affirmed their rating on Bahrain at ‘B+’ with a stable outlook.

FX

• The dollar continued to rally overnight even as US yields pulled back somewhat. Risk assets generally were sold, helping to support a pull for the dollar. The broad DXY index closed up above 100 for the first time since peak Covid in Q2 2020. EURUSD fell by 0.5% to 1.0828, beset by anxiety that the war in Ukraine will escalate further. USDJPY managed to hold at recent elevated levels, closing at 125.38.
• Sterling closed lower as investors moved out of risk but political noise in the UK surrounding “Partygate” will also act as a negative in the near-term. GBPUSD fell 0.2% to 1.3001.
• Commodity currencies were mixed overnight with USDCAD closing up 0.1% at 1.2644 ahead of today’s Bank of Canada meeting where a 50bps hike is expected by the market. AUDUSD rose 0.53% to 0.7546 while NZDUSD is up strongly this morning following the RBNZ raising rates by 50bps.  

Equities

• US equities fell further yesterday as inflation came in high once again in March, although the core inflation print was better than expected, and this likely softened the overall dip. All three major indices – the Dow Jones, the NASDAQ and the S&P 500 – fell -0.3%, relatively soft compared to some of the recent moves. Nevertheless, the three are still down -5.8%, -14.5% and -7.7% respectively so far this year.
• The dim likelihood of any imminent ceasefire in Ukraine has continued to weigh on European equity markets, and Germany’s DAX lost a further -0.5% yesterday. In France, the CAC dropped -0.3% and the UK’s FTSE 100 fell -0.6%.
• Locally, the DFM dropped -0.5% and the ADX -0.6% but the Tadawul closed the day 1.2% higher. Dubai utilities company DEWA gained around 20% on its market debut yesterday.

Commodities

• Oil prices reversed their losses from the start of the week with both Brent and WTI futures closing back above USD 100/b. Brent settled at USD 104.64/b, up 6.3%, while WTI added 6.7% to close at USD 100.60/b. Signs of deteriorating diplomatic conditions around Russia’s war in Ukraine will mean a prolonged threat to the viability of Russia’s oil supply while China looks to also be easing some of the more stringent lockdown conditions in Shanghai.
• In its monthly assessment of oil markets, OPEC lowered both its supply and demand forecasts as a consequence of the war in Ukraine. With near even impacts on both sides of oil market balances, that helps to reinforce the OPEC+ position of only gradually returning barrels to the market.
• The API reported a sizeable build in US crude inventories last week with total stockpiles up 7.8m bbl. Gasoline and distillate inventories drew by 5m bbl each.

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