Markets Daily
Markets were rattled by stronger than expected US CPI inflation data. US bond yields and the US dollar jumped significantly, and equities fell, the S&P500 down 1.0%.
Currencies/Macro
The US dollar index is up 1.0% on the day, and at a high since November after the March US CPI rose more than expected, weighing heavily on Fed rate cut expectations. EUR fell from 1.0867 to 1.0729. USD/JPY rose from 151.80 to 152.98 – a 34-year high.
Underperformer AUD fell from 0.6620 to 0.6499, giving up all of its gains over the last week. NZD fell from 0.6083 to 0.5966. AUD/NZD fell from 1.0920 to 1.0875, yesterday’s RBNZ MPR proving to be slightly negative for the cross.
US CPI in March rose 0.4%m/m and 3.5%y/y (est. 0.3%y/y and 3.4%y/y), with ex-food and energy up 0.4%m/m and 3.8%y/y (est. +0.3%m/m and 3.7%y/y).
Minutes from the previous FOMC meeting reiterated that participants judged rates had likely peaked this cycle. And "almost all participants" thought it would be appropriate to trim rates at some point this year. Committee members noted uncertainties over the "persistence of high inflation and said that "recent data had not increased their confidence that inflation was moving sustainably down to 2%." On the balance sheet, a "cautious" approach to the runoff was seen as appropriate and the "vast majority" thought it prudent to begin slowing the pace "fairly soon."
FOMC member Goolsbee said on inflation: “These first three months of this year, they’re definitely worse. I still think that we have a little bit of mileage to go but we’re getting to the point where there’s going to be more trade-offs than there were last year. Barkinsaid: ”I think we’re making a lot of progress but we need to be humble about how easy it is to get there”.
Bank of Canada kept policy settings unchanged, as was widely expected at 5.00%. However, despite increasing growth forecasts, they also profiled inflation falling below 2.5% in 2H’24 and hitting their 2% target in 2025. Governor Macklem then stated that the potential to ease in June remains.
Fitch cut China's credit outlook from stable to negative. Fitch Ratings affirmed China's A+ rating today, but reduced the outlook from stable to negative, against the background of significant fiscal deficits and a surge in government debt in recent years.
Interest rates
The US 2yr treasury yield rose from 4.75% to 4.98%, while the 10yr yield rose from 4.35% to 4.56%. Markets price the Fed funds rate, currently 5.375% (mid), to be unchanged at the next meeting on 2 May, with June dropping from a 55% chance of a cut to just 10%, July at 40%, and September at 85%.
Australian government bond yields (futures) rose from 3.64% to 3.80%, while the 10yr yield rose from 4.09% to 4.23%. Markets currently price the RBA cash rate to be unchanged at the next meeting on 7 May, with a 60% chance of a cut by September.
New Zealand rates markets price the OCR, currently at 5.50%, to be unchanged at the next meeting on 22 May.
Credit indices saw a similar reaction with Main a bp tighter leading into the CPI print but closing half a bp wider at 55 and CDX closed over 2bp higher at 53, however cash has held in better. Primary activity continued in Europe ahead of the ECB tonight, albeit volumes were lower as 7 issuers price EUR3.5bn which included 3 HY issuers, and BNS priced a EUR1bn 5yr at MS+75. The US saw a single deal (Engie Chile USD500M 10yr green bond) with reports that 3 issuers stood down post the CPI print.
Commodities
Crude markets bucked the risk off move elsewhere plus higher than expected EIA inventory data with the focus on warnings from the US that an Iranian proxy attack on Israel was seen as imminent and may happen in coming days. The May WTI contract is up 1.19% at $86.24 while the June Brent contract is up 1.22% at $90.51. The Ayatollah Ali Khamenei again repeated a vow to retaliate against Israel for the Damascus strike while press reported that the political leader of Hamas said that three of his sons were killed in an Israeli air strike. The EIA reported that crude inventory rose by a larger than expected 5.8mb, while distillate inventory rose by 1.6mb and gasoline by 717kb. US crude exports fell by a hefty 1.3mbpd, taking then to the lowest since August. Crude imports from Mexico fell to their lowest in weekly data back to 2010. Macquarie warned that “it will be difficult to maintain Brent above $90 into 2H24 without actual supply disruption associated with geopolitical events”.
Metals were more mixed with the stronger than expected US CPI outcome knocking copper back below $9,400, to be last at $9,398 down 0.2% though aluminium remains above $2,400, last at $2,471 up 0.45%. Nickel rose another 1.5% to $18,495. There was little fresh news, though MMGs Las Bambas copper mine was reported as facing renewed protests with the highway authority reporting that the key transport road had been restricted since April 4. BofA’s Blanch told Bloomberg that copper will rise 30% in the next 12 months given that “you need to connect renewables to the grid, and you need to improve the grid and that takes a lot of copper”.
Finally note that iron ore saw some signs of profit taking though remained close to a two-week high with the May SGX contract down 95c from the same time yesterday at $106.45 while the 62% Mysteel index fell $1.35 to $106.15. Shares and bonds of China Vanke extended declines in afternoon trade with news that a regional manager was assisting an investigation adding to the losses. However, Goldman raised its forecast for China’s growth and expects the economy to have grown by 7.5% at an annualised pace in Q1 with the data set to be released next week. Goldman sees growth through the year at 5% versus 4.8% previously, helped by a rebound in manufacturing. Bloomberg noted that several ministries were forecasting a 25% increase in industrial equipment investment by 2027 from 2023 levels.
Day ahead
China: The March CPI and PPI updates will likely confirm a weak pulse for price momentum as consumers and businesses remain uncertain on the outlook (market f/c: 0.4%yr and –2.8%yr).
Eurozone: The ECB is widely expected to leave rates unchanged at its upcoming meeting. Any shift in guidance that supports prospects for a rate cut in June will be in focus (Westpac f/c: 4.00% deposit rate).
US: March’s PPI should remain consistent with at-target goods inflation (market f/c: 0.3%). Initial jobless claims should meanwhile remain at a relatively low level (market f/c: 215k). The FOMC’s Williams, Barkin, Collins and Bostic are due to speak.
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