Three is a crowd
CPI once again topped estimates providing little comfort and support towards the Fed’s will to begin cutting interest rates:
- US March CPI* inflation hotter than expected – Headline 3.5%, expectation was 3.4% – Core 3.8% against 3.7%, also a surprise
- Three-month average at 4.2%, six-months at 3.9%
- Three upside surprises are hard to ignore!ù
- Textbook market reaction:
- Bond yields up
- US Dollar up
- Equities down
- Strong retail sales (+0.7% vs. 0.4%) reinforce the perception of strength in the economy
- Fed’s Chairman Powell himself has doubts!
Fed: Higher for (even) longer
Chair Powell signaled there is no rush to cut interest rates– recent data shows little improvement on inflation, rates can be kept steady for as long as needed!
- “Lack of additional progress made on inflation after the rapid decline witnessed end of 2023, more time is needed to gain sufficient confidence in reaching 2% inflation target”
- Market now pricing less than two cuts in 2024-Reduction of rates may come relatively late in the year, if at all
- Furthermore, the Fed cannot ignore the November presidential elections
- Treasury yields reaching year to date highs– two year briefly exceeding 5.0%, the highest level since November
ECB meeting reading
ECB April meeting increases the optimism around a first cut by central bank in June - unless April/May data surprises to the upside
- Optionality has been retained– but probability of no action in June seems low. Some members of Governing Council were in favor of already cutting in April!
- Fed sensitive, not Fed dependent!
- Almost no information given on future moves after June– decisions will be taken meeting by meeting with mantra remaining data dependency
- Stickiness in inflation, also in light of new developments in the Middle East, suggests ECB will tilt towards gradual moves
Commodities rally
- Gold’s conundrum– models have broken down
- Dollar, real rates, volatility fail to explain gold’s rally
- Other factors are at play, like geopolitics
- Oil– Middle East tensions
- The price response to Iran’s attack has been muted…
- …but war premium of $5-10$ was already baked in • And, Iran has greatly increased productions lately
- Silver is amongst the best commodities since the beginning of the year, outshining gold
- Copper on the rise, but we need to wait for a solid recovery in China
Reporting season
US-Banks 1Q24: strong figures, but gloomy outlook
- The air is getting thinner for U.S. banks: JP Morgan, Citigroup and Wells Fargo expect lower revenues in the future in view of the monetary policy. Possible interest rate cuts by the Fed are casting the first shadows over the business of major US banks
- JPM: Despite favorable economic indicators (and results), the outlook for the full year is cautious, citing global conflicts, persistent inflationary pressures and central bank policy
- WFC: Facing higher interest rates, customers are taking out fewer new loans, but at the same time are investing more. As a result, the net interest margin and profit declined by 7%
- Morgan Stanley: Earnings and revenue (+4%) beat. Strong net new asset growth across Wealth and Investment Management
- Goldman Sachs: also exceeded expectations in its core businesses and reiterated the cautious forecasts of its competitors
Oil & Gas
Oil markets tightening in Q2. Brent is now trading above USD90/bbl on the back of various geopolitical tensions, but that is not the only reason:
- Demand is proving more resilient than initially feared with 2024 oil demand growth being revised up
- Geopolitical tensions likely to worsen short term with an unpredictable outcome for the oil price
- The IEA noted in its March report that longer trade routes (due to shipping disruptions through the Red Sea) have tied up
- Saudi Arabia and other OPEC members had previously committed to extending all the voluntary cuts until the end of June
- A high oil price going into the US elections helps Trump and could arguably be a handicap for Biden
China's growth
- On Tuesday, China released a number of data • GDP +5.5% y-o-y*
- Analysts had expected 4.6%
- The Statistics Bureau says the foundation for economic stability is not yet solid
- Industrial production +6.1%
- A -2.7% fall in producer prices shows persistent pressure on manufacturing
- Construction investment keeps falling
- The data still points to a tepid recovery… • … which will require further policy support
- Housing weakness, local government deleveraging and low confidence hinder any solid recovery
Disclaimer
The information, products, data, services and instruments contained or described in this publication are for information purposes only and constitute neither an advertisement or recommendation nor an offer or solicitation to buy or sell any product.
The financial products described in this publication are not suitable for all investors. The information contained in this publication does not represent any financial, legal, tax and/or other recommendations. Any investment or other decision should not be made solely on the basis of this document. Before making any investment decision, it is recommended that you seek a thorough examination of your situation and the advice of a qualified specialist.
Although the information contained in this document has been compiled by PKB on the basis of or with reference to sources, materials and systems believed to be reliable and accurate, PKB does not guarantee its currency, accuracy or completeness.
PKB accepts no liability, to the fullest extent permitted by applicable laws and/or regulations, for loss or damage of any kind arising directly or indirectly from the content, accuracy, completeness or otherwise of the content or any third party content referred to in this publication.
The analyses and forecasts contained in this publication are based on assumptions, estimates and hypothetical models which may prove to be incorrect and therefore lead to substantially different results.