US CPI Data Unlikely To Ease Sticky Inflation Worries, But Will Markets Care?

Economic

Summary:

US CPI inflation expected to have ticked up in March.But markets may shrug it off if core figure inches lower.

Will CPI report boost rate cut bets?

Inflation data according to the CPI and PCE measures have started to diverge lately, clouding the outlook just as the Fed seeks more clarity on where prices are headed. Headline CPI has persisted above 3.0% since last summer, while core CPI has been declining at a snail’s pace.

It’s a somewhat more favourable trend when looking at the personal consumption expenditures (PCE) metric that the Fed prefers to focus on. The headline PCE price index rose marginally to 2.5% in February, but core PCE eased to 2.8%.

But for the consumer price index, there probably wasn’t much of a convergence in March. The yearly headline rate of CPI is expected to have edged up to 3.4% in March from 3.2%, with the month-on-month rate moderating to a 0.3% pace from 0.4%. Core CPI is also expected to have fallen slightly, both on a monthly and annual basis, expected at 0.3% and 3.7% respectively. US CPI Data Unlikely To Ease Sticky Inflation Worries, But Will Markets Care?_1

US CPI Data Unlikely To Ease Sticky Inflation Worries, But Will Markets Care?_1

June rate cut no longer a done deal

Whilst such figures would not necessarily raise any alarm bells, neither would they calm fears about inflation bottoming out before reaching the Fed’s 2% target. But for the moment, Fed officials remain optimistic that inflation will decline further in the coming months, allowing it to cut rates at some point in the second half of the year. It’s unlikely that the minutes of the March FOMC meeting will sway much from this message.

The expectation that one way or another, rates cuts are coming, and that the US economy will almost certainly avoid a recession is what has negated the disappointment from the fading bets for a June rate cut.

The odds for a 25-basis-point cut in June have been scaled back sharply in recent weeks, and even more so after Friday’s bumper payrolls report. Markets are evenly split on the odds of the Fed beginning its rate cutting cycle in June, compared to it being almost fully priced in a few weeks ago.

Markets hopeful inflation will fall

The US dollar has been in a broad uptrend this year as investors have been repeatedly forced to re-evaluate the timing of Fed easing. Yet, there’s still a tendency to put more weight to the soft indicators than the hot data and this is keeping a lid on dollar gains.

For example, the drop in the ISM services prices paid index more than offset the impact from the jump in manufacturing prices days earlier as well as hawkish commentary from Fed officials during the week. Meanwhile, cooling wage pressures in the March NFP numbers were enough to keep jitters over accelerating jobs growth to a minimum.

A goldilocks economy

To be fair, the notion that the US labour market can continue to grow without fuelling faster pay increases is not entirely unreasonable amid the influx of migrants into the country that is boosting the supply of labour and thus meeting the rise in demand.

But even if this goldilocks scenario can last, solid consumer demand on the back of the tight labour market will be a hindrance to getting inflation down all the way to 2%, particularly for services inflation. CPI less rental costs edged up to 3.9% in February, having reversed from a low of 2.8% last September. If the decline in the ISM services price gauge translates to a softer reading for the CPI component as well, that could be enough to sustain the current positive sentiment in the markets even if the headline figure ticks higher.

US CPI Data Unlikely To Ease Sticky Inflation Worries, But Will Markets Care?_2

However, if either or both the core and services CPI prints are stronger than forecast in March, the upbeat mood may fade, lifting the dollar, but weighing on Wall Street.

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Samantha Luan

Economic

The boss of the US bank JP Morgan has warned that the world could be facing the most dangerous moment since the second world war, putting lives and economic growth at risk.

In his annual letter to investors, Jamie Dimon said the world had been “generally on a path to becoming stronger and safer” in recent years but had suffered a major reversal in February 2022 when Russia invaded Ukraine.

“When terrible events happen, we tend to overestimate the effect they will have on the global economy,” Dimon said. “Recent events, however, may very well be creating risks that could eclipse anything since world war II – we should not take them lightly.”

The Wall Street banking boss did not mention Israel’s assault on Gaza in recent months, but said the “abhorrent attack on Israel and ongoing violence in the Middle East” had also “punctured many assumptions about the direction of future safety and security, bringing us to this pivotal time in history”.

In a wide-ranging letter to investors covering everything from politics and artificial intelligence to interest rates, Dimon warned that the breakdown in international relations “may end up having virtually no effect on the world’s economy or it could potentially be its determinative factor”.

He added: “The ongoing wars in Ukraine and the Middle East could become far worse and spread in unpredictable ways. Most important, the spectre of nuclear weapons – probably still the greatest threat to mankind – hovers as the ultimate decider, which should strike deep fear in all our hearts.

“The best protection starts with an unyielding resolve to do whatever we need to do to maintain the strongest military on the planet – a commitment that is well within our economic capability.”

It follows similar warnings from the International Monetary Fund, which in December said the global economy was on the brink of a second cold war that could “annihilate” progress made since the collapse of the Soviet Union.

Gita Gopinath, the IMF’s first deputy managing director, said at the time that the world was at a “turning point” as tensions mounted between the most powerful nations, and that the accelerating fragmentation of the world economy into regional power blocs – centred around the US and China – risked wiping out trillions of dollars in global output.

“If we descend into cold war two, knowing the costs, we may not see mutually assured economic destruction. But we could see an annihilation of the gains from open trade,” she said.

Dimon warned that a surge in government spending – linked not only to higher military expenditure but also climate transition plans, healthcare costs and shifting global supply chains – could lead to “stickier inflation and higher rates than markets expect”.

JP Morgan, he said, already had contingency plans in place for US interest rates – which are now in a range of 5.25% to 5.5% – to rise higher than 8%, or fall as low as 2%.

“We have ongoing concerns about persistent inflationary pressures and consider a wide range of outcomes to manage interest rate exposure and other business risks,” he added.

The IMF on Monday warned the world’s most powerful central banks against keeping interest rates high for too long.

The Washington-based fund said the Bank of England should be wary of keeping current high borrowing costs because of a higher proportion of UK homeowners on a fixed-rate mortgage than in some countries, which had weakened the impact of ratcheting up interest rates.

It comes after the Organisation for Economic Co-operation and Development, a member body including 38 of the world’s leading democratic economies, said food prices across the world’s richest nations rose in February at the slowest rate since before the Russian invasion of Ukraine.

It could help fuel several interest rate cuts this year, although analysts have become more cautious in recent weeks about the extent of any reductions.

Source: The Guardian

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Ukadike Micheal

Economic

Forex

Bank of Japan Governor Kazuo Ueda kept his options open for further scaling back of monetary easing measures, indicating a cautious approach amidst the yen's proximity to a 34-year low. During a parliamentary session, Ueda emphasized the necessity of evaluating the underlying price trend and economic outlook before considering adjustments to the degree of monetary easing, reflecting the central bank's vigilance in managing economic risks.

The yen's persistent weakness has heightened concerns among currency traders about potential intervention by Japan's central bank. The anticipation further intensified ahead of the release of US CPI data, with the possibility of stronger-than-expected results potentially exacerbating yen weakness and breaching the critical 152 mark against the dollar, a level perceived by some investors as a potential trigger for intervention.

Despite the Bank of Japan's recent rate hike, the yen has remained stubbornly weak, prompting questions about the central bank's commitment to maintaining accommodative financial conditions. This skepticism reflects investor sentiment regarding the perceived dovishness of the Bank of Japan's stance and underscores the challenges faced in managing monetary policy amidst evolving economic conditions and currency dynamics.

In a semi-annual report to parliament, Governor Ueda highlighted the risks associated with both a faster and slower reduction in stimulus measures. He noted that while economic shocks may necessitate a slower adjustment, a rapid strengthening of the virtuous cycle of wages and inflation could require expedited action from the central bank, emphasizing the need for flexibility in policymaking to address changing economic circumstances.

The nuanced approach taken by Governor Ueda underscores the complexity of navigating monetary policy amid uncertain economic conditions and heightened market volatility. Balancing the imperative of continued support for economic recovery with concerns about potential inflationary pressures remains a delicate task for policymakers, requiring careful consideration of a wide range of factors and close monitoring of economic indicators.

Governor Ueda's remarks signal a cautious stance regarding the future trajectory of monetary policy, reflecting the central bank's commitment to ensuring stability and sustainable economic growth. As the Bank of Japan continues to assess economic developments and global trends, market participants will closely scrutinize any signals regarding potential adjustments to monetary policy, highlighting the significance of central bank communication in shaping market expectations and investor sentiment.

Source: Bloomberg

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Ukadike Micheal

Forex

Economic

Euro zone banks recently loosened their criteria for mortgage approvals, marking the first time in over two years, as revealed by a European Central Bank (ECB) survey. Despite this adjustment, demand for credit remained subdued amidst the backdrop of high borrowing costs and an economy experiencing stagnation.

The ECB's decision to raise interest rates to record highs was aimed at reining in inflation, but it resulted in a standstill in bank credit growth across the 20 countries sharing the euro.

While banks exhibited a cautious easing of standards, particularly for home loans, households and businesses displayed little enthusiasm for taking on additional debt, as indicated by the ECB's quarterly Bank Lending Survey.

Although there was a notable relaxation in the approval standards for household loans for house purchases, banks reported a significant decline in credit demand from companies, a trend that was unexpected compared to previous quarters. Additionally, there was only a marginal decrease in demand for housing loans.

The ECB attributed the subdued loan demand to various factors, including the impact of higher interest rates, reduced investment by firms, and decreased consumer confidence among households.

Despite the current dampening effect on loan demand, banks expressed a more optimistic outlook for the upcoming quarter, anticipating a moderate improvement in demand for corporate loans and even an increase in demand for household loans.

Anticipating future interest rate cuts from the ECB, banks adjusted interest rates on new mortgages accordingly. However, this adjustment is also projected to put an end to banks' record profits, with expectations of a moderately negative impact on overall bank profitability due to provisioning and impairments.

This development highlights the intricate relationship between monetary policy, economic conditions, and the behavior of financial institutions within the euro zone. As the ECB continues to navigate the delicate balance between addressing inflation concerns and supporting economic growth, it must closely monitor the implications for bank lending and profitability.

While the recent relaxation in mortgage approval standards indicates some responsiveness to monetary policy, the persistently low demand for credit underscores the ongoing challenges facing the euro zone economy. Moving forward, the ECB's decisions regarding interest rates and their impact on the banking sector will play a crucial role in shaping the region's economic trajectory.

Source: Yahoo Finance

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Thomas

Central Bank

Economic

All 11 analysts polled by Reuters expect the Monetary Authority of Singapore (MAS) to hold off making changes to its policy in the scheduled review on Friday.

"We expect MAS to hold its monetary settings steady at the April meeting. Although headline and core inflation have been on a bumpy downtrend, core inflation remains stubbornly above the central bank's 2% target," said Denise Cheok, economist at Moody’s Analytics.

"Provided the inflation outlook stabilises, we see MAS loosening monetary settings in the second half of the year."

Inflation in the Asian financial hub remains sticky. It cooled to 3.1% in January before speeding up to a 7-month high of 3.6% in February as seasonal effects from the Lunar New Year drove services and food prices higher.

The trade ministry and the central bank said in a joint statement last month that core inflation is expected to moderate over the rest of the year as import cost pressures decline and the labour market eases.

They projected both headline and core inflation to average 2.5% to 3.5% for 2024, unchanged from previous official forecast.

Central banks globally are starting to reverse their rapid interest rate hikes. The Swiss National Bank made a surprise 25 basis point cut last month and the European Central Bank is likely to follow in June.

Still, analysts expect reversals to be modest with periodic pauses as central banks try to balance growth and inflationary concerns.

"History shows that MAS did not rush into easing after inflation peaked at previous cycles in 2010s. Instead, the MAS maintained its appreciating policy stance on hold for a while," OCBC analysts said in a research note.

'NO RUSH TO RELAX POLICY'

Singapore is often seen as a bellwether for global growth as its international trade dwarfs its domestic economy.

Its economic growth slowed to 1.2% in 2023 from 3.6% in 2022. GDP rose 2.2% on a year-on-year basis in the fourth quarter, lower than an advance estimate of 2.8%.

The trade ministry projects growth of 1% to 3% in 2024.

In a survey published by the central bank last month, economists upgraded their 2024 growth forecast.

The MAS left monetary policy unchanged in April and October last year and January this year, reflecting growth concerns, having tightened policy at five consecutive reviews prior to that.

This year, MAS is making monetary policy announcements every quarter instead of semiannually.

Instead of using interest rates, the central bank manages monetary policy by letting the local dollar rise or fall against currencies of its main trading partners within an undisclosed band, known as the Singapore dollar nominal effective exchange rate, or S$NEER.

It adjusts policy via three levers: the slope, mid-point and width of the policy band.

Maybank economists said policy easing will happen in October at the earliest, "via a gentler S$NEER slope".

"There is no rush to relax monetary policy at this juncture, given an export-driven economic recovery and still-elevated inflation," they said.

Source: Reuters

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Glendon

Economic

The GBP/USD currency pair has been experiencing a downward trend, recently closing at 1.2450 in Thursday's early Asian session. This movement is largely influenced by recent economic data and evolving expectations regarding interest rate policies from both the Bank of England (BoE) and the Federal Reserve (Fed).

Softening UK Inflation and BoE's Response

Recent UK inflation data revealed a decline in the Consumer Price Index (CPI) to 3.2% for the year ending in March, significantly down from previous highs. This softening of inflation has led to speculation that the BoE might initiate interest rate cuts sooner than anticipated, potentially as early as August or September. Despite this easing inflation, the Pound has weakened against the Dollar, reflecting market reactions to potential cuts in interest rates which tend to decrease the attractiveness of a currency.

UK Labor Market and Economic Forecasts

Further insights into the UK's economic health are provided by labor market statistics, which show a slight increase in unemployment to 4.2% in February, surpassing market expectations. While average earnings including bonuses remained stable, earnings excluding bonuses showed a slight decline. These factors combine to present a mixed picture of the UK economy, with stable wage growth but slightly rising unemployment rates.

Fed's Cautious Stance Amid Strong US Economic Indicators

In contrast, the US has displayed strong economic indicators, such as robust retail sales in February, suggesting a resilient economy. This strength has led to speculation that the Fed might delay its anticipated easing cycle. Fed Chair Jerome Powell has adopted a cautious stance, indicating that the central bank will wait longer than expected to cut rates due to recent unexpectedly high inflation readings in the US. This approach aims to ensure that inflation consistently trends towards the Fed's target of 2% before any policy easing, providing underlying support to the USD.

Technical Analysis and Market Sentiment

From a technical perspective, the GBP/USD pair has broken below key support levels, suggesting potential for further declines. The next levels of support are identified at 1.2381 and 1.2303, which traders are closely watching for potential breaks that could signal a further weakening of the Pound. Market sentiment, as indicated by IG Retail data, shows a majority of traders are net-long on GBP/USD, a traditional contrarian indicator that might suggest the potential for further price declines.

Upcoming Economic Data and Its Implications

Investors are keenly awaiting further US economic data releases, such as the weekly Initial Jobless Claims, the Philly Fed Manufacturing Index, the CB Leading Index, and Existing Home Sales. These reports are expected to provide additional cues that could influence the GBP/USD trading dynamics in the short term.

Conclusion

The contrasting monetary policy outlooks between the BoE and the Fed are central to the current trends in the GBP/USD exchange rate. With the UK potentially lowering interest rates in response to easing inflation and the US maintaining a more robust economic stance, the pair may continue to experience volatility. Investors and traders will need to stay vigilant, closely monitoring incoming economic data and central bank communications to navigate the complexities of this major currency pair.

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Alex

Economic

Central Bank

Demand for corporate loans in the euro area saw a “substantial decline” in the first quarter as the region continues to reel from elevated borrowing costs that probably won’t be cut until the middle of the year, the European Central Bank said.

The ECB’s quarterly Bank Lending Survey, published Tuesday, also showed that credit standards — banks’ internal guidelines or loan-approval criteria — were a little tighter for firms across the 20-nation bloc. There was a moderate easing for mortgages for the first time since late 2021.

“Higher interest rates, as well as lower fixed investment for firms and lower consumer confidence for households, exerted dampening pressure on loan demand,” the ECB said. “The substantial decline in loan demand from firms contrasted with banks’ prior expectations of a stabilization.” Euro-Zone Firms’ Loan Demand Fell ‘Substantially,’ ECB Says_1

Euro-Zone Firms’ Loan Demand Fell ‘Substantially,’ ECB Says_1

A separate poll released Monday by the ECB showed companies reported a modest reduction in the need for loans in the first quarter, while fewer reported a reduction in their availability.

Officials in Frankfurt are parsing such data to determine how soon and how quickly they can undo their unprecedented series of interest-rate increases. With inflation in retreat, cuts are expected to begin in June. Analysts widely expect the deposit rate to be kept at a record-high 4% when policymakers meet this week.

“The weaker firm loan demand raises the risks of an investment slowdown later in the year,” said Tomasz Wieladek, chief European economist at T. Rowe Price. “This is a clear indicator that monetary policy remains too tight in the euro area.” Euro-Zone Firms’ Loan Demand Fell ‘Substantially,’ ECB Says_2

Euro-Zone Firms’ Loan Demand Fell ‘Substantially,’ ECB Says_2

Despite just managing to escape a recession after Russia attacked Ukraine and consumer prices surged, the bloc has barely registered any growth in more than a year.

Banks continued to enjoy a “markedly positive” impact on their net interest margins over the past six months from the ECB’s rate hikes, though the cumulative effect is expected to diminish over the next half year.

While corporate loan demand may decrease further in the second quarter, according to Tuesday’s survey, it should pick up for households. Lenders expect moderately tighter credit standards for firms.