Bullish US Markets Shrug Off Higher Inflation And Await Rate Cuts

Central Bank

Economic

Summary:

It has been relatively painless for the Fed to lower inflation to 3 per cent, but reducing it to 2 per cent – the fabled last mile – will be challenging.

The inflation battle is proving tougher than expected, but that hasn’t shaken investor confidence in the United States that the Federal Reserve will deliver on the three interest rate cuts it has pencilled in this year.

Confidence that the Fed remains on track to cut interest rates as soon as June helped propel the S&P 500, to its 17th record close of the year, even though US inflation was slightly stronger than expected in February. The consumer price index rose 3.2 per cent last month from a year earlier, faster than the 3.1 per cent set in January.

Core inflation, which excludes more volatile food and energy prices, was up 3.8 per cent in February, a slight improvement from the 3.9 per cent in December and January.

Economists said February’s core CPI reading of 0.4 per cent for a second straight month pointed to lingering stickiness in inflation against a backdrop of robust US economic growth.

The big question now for investors is whether the Fed will still be able to engineer a soft landing, where it guides inflation lower without causing economic growth to falter, and the jobless rate to spike higher.

More pessimistic economists warn that persistent inflation means that the US economy is headed for “soft stagnation”, where economic activity slows to a crawl, while inflation remains stubbornly above the Fed’s 2 per cent target. But the optimists argue that the more likely outcome is a “no landing” scenario, with the US economy continuing to enjoy robust economic growth, while inflation remains above target.

They point out that it’s been relatively painless for the Fed to lower inflation to 3 per cent, but reducing it to 2 per cent – the fabled “last mile” – will be challenging. That’s because the fundamental factors driving inflation – the strong US jobs market, and housing-related inflation and higher inflation expectations – are causing price pressures to persist.

The US economy is enjoying robust growth, propelled by strong spending by the government and households. Meanwhile, the sharemarket is at a record high, reflecting a widespread confidence among consumers, businesses and investors that strong economic growth will continue.

Stubborn inflation

The strong rally in US markets means that financial conditions are extremely loose, which is pushing the prices of risky assets, such as share prices and bitcoin, even higher. And even though the unemployment rate ticked up to 3.9 per cent in February, the jobs market remains tight. Wage growth remains well above pre-pandemic levels, even though it has slowed sharply since 2021, particularly for low-paying jobs.

In contrast, managerial and professional occupations have had stable, or only slightly falling wage growth.

What’s more, even though price pressures have eased, inflationary expectations remain well above pre-pandemic levels.

According to the Federal Reserve of New York’s February survey, US consumers’ inflation expectations remain unchanged at 3 per cent for the coming year, but have increased to 2.7 per cent from 2.4 per cent for the next three years.

Expectations that inflation will remain high are concerning because of their effect on consumer and business behaviour. If consumers expect higher inflation, they’re more likely to push for higher wage rises. And if business expect higher inflation in the future, they’re more likely to increase prices to compensate for future rises in labour costs.

Investors, however, are untroubled by the prospect of stubborn inflation because it should allow companies to maintain their pricing power, which will translate into stronger corporate earnings.

Especially since investors remain confident that the Fed will deliver three rate cuts this year, with the first coming in June.

That’s because inflation has already fallen sharply, and if the Fed doesn’t cut rates, then real interest rates will be higher.

Last week, Fed chairman Jerome Powell signalled that the Fed would cut rates even if inflation remained above the central bank’s 2 per cent target.

“We’re not looking for better inflation readings than we’ve had”, he said. “We’re just looking for more of them.”

Source: Financial Review

To stay updated on all economic events of today, please check out our Economic calendar

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WELLS FARGO

Economic

Central Bank

The February consumer price data came in a touch stronger than expected. The headline CPI increased 0.4% in the month, led by higher gasoline prices (+3.8%). Excluding food and energy prices, core inflation also registered 0.4%. However, the unrounded 0.36% bump in core CPI was not too far off our forecast for a 0.30% gain. Furthermore, core price growth was flattered by bigger than expected increases in volatile components such as used autos and airfares. Housing inflation cooled as owners' equivalent rent increased 0.4%, a step down from the eye-catching 0.6% jump in January.

In our view, the details of today's CPI report generally were encouraging. We expect core goods deflation to return in the coming months amid improved supply chains and less supportive seasonal factors. The much-anticipated slowdown in primary shelter inflation is ongoing. A cooling jobs market has brought about slower labor cost growth, and the widespread easing in this month's "super core" suggests services inflation may not be as sticky as some feared following last month's CPI report

That said, we doubt today's report fills the FOMC with the confidence it needs to begin cutting rates. The core CPI has risen at 4.2% annualized rate over the past three months, which is a bit higher than the 3.8% increase in core prices over the past 12 months. We expect disinflation progress to resume in the coming months for the reasons listed above, but we think the FOMC will need to see it to believe it. The first rate cut from the FOMC looks increasingly likely to occur this summer. We will be publishing our FOMC preview report and Monthly Economic Outlook in the coming days, and we will update our fed funds rate outlook in those publications. FOMC Still Searching for Confidence_1

A Little More Inflation Than Expected

Consumer prices advanced 0.4% in February, in line with consensus expectations. The overall energy index, which accounts for a little under 7% of the CPI, increased 2.3% in February. As expected, the headline CPI was lifted by a jump in gasoline prices (+3.8%). Compared to one year ago, gasoline prices are still down 3.9%. Energy services rose a smaller 0.8%, led by utility gas service (+2.3%). Food inflation was more benign in February, with prices unchanged in the month. Grocery store prices were flat while prices at restaurants and bars increased 0.1%—the smallest monthly increase in three years. Over the past year, food inflation has cooled significantly and is now back in line with pre-pandemic norms (Figure 1). FOMC Still Searching for Confidence_2

Excluding food and energy, the gain in CPI was a touch stronger than expected. The core index advanced 0.36%, a bit above the Bloomberg consensus and our own expectation for a 0.30% gain. The somewhat firmer reading stemmed from core goods, which rose for the first time in eight months (+0.1%). As we flagged in our CPI preview, however, core goods prices looked susceptible to being bolstered by some residual seasonality in February after price increases were more dispersed throughout the calendar year the past few years. Contributing to the rise was a small rebound in prices for used vehicles, apparel and education and communication goods, which offset declines in new vehicles, motor vehicle equipment, household and recreational goods. We expect to see core goods return to deflationary territory over the next few months amid the broad improvement in supply chains and less supportive seasonal factors. FOMC Still Searching for Confidence_3

Core services, on the other hand, cooled largely as expected (Figure 3). A 0.7% jump in core services in January drove inflation's unexpected pop to start the year. In February, core services prices advanced "just" 0.5% (0.46% before rounding). After making waves in January, owners' equivalent rent growth eased in February (+0.4%). With rent of primary residences picking up in February (+0.5%), last month's eye-catching gap between the two largest components of the CPI collapsed. Through the recent monthly volatility, the trend in housing inflation remains downward. Both the year-over-year rate of OER and rent of primary residences registered the smallest increases since the summer of 2022, and a further slide appears in store with private-sector measures of rent growth having largely returned to their pre-pandemic rates (Figure 2). FOMC Still Searching for Confidence_4

Excluding primary shelter, core services also advanced at a less concerning rate in February. The CPI version of the "super core", watched by Fed officials to better gauge services inflation given the long lag in shelter inflation, advanced 0.4% after a 0.9% gain in January. The more moderate reading was helped along by a partial reversal of last month's jump in medical and personal care services, as well as smaller monthly gains in lodging away from home, motor vehicle insurance and maintenance services. The broad cooling in the CPI "super core" in February suggests services inflation is not as sticky as initially feared following January's sharp upside surprise.

On a year-ago basis, consumer prices are up 3.2%, a more palatable increase than the 6.0% increase registered this time last year but little different from the past few months (Figure 4). The recent pace of core inflation, having registered a 4.2% annualized rate over the past three months, also points to some near-term stalling in inflation's descent. However, we expect the lack of recent progress to be temporary. Price pressures across the economy continue to broadly abate. Labor costs are cooling as the jobs market softens. Consumers, while still spending, are not the price-takers they were a year or two ago as revenge spending dissipates and delinquencies creep higher. The supply chain kinks that helped drive core goods inflation to 47-year high largely have unwound, making it easier for businesses to secure product. In a separate report this morning, the February NFIB Small Business Optimism Index showed the smallest share of businesses raising prices in three years. FOMC Still Searching for Confidence_5

While a downward trend in inflation remains in place in our view, the slow progress seen over the past few months is likely to keep the Fed searching for a bit more confidence that inflation is on a sustained path back to its 2% target. The first rate cut from the FOMC looks increasingly likely to occur this summer. We will be publishing our FOMC preview report and Monthly Economic Outlook in the coming days, and we will update our fed funds rate outlook in those publications.

To stay updated on all economic events of today, please check out our Economic calendar

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Alex

Commodity

It’s been a while since a WASDE (World Agricultural Supply and Demand Estimates) update in November, but agricultural markets have suffered some severe losses. Since then, grain markets have been smashed in 2024 due to increased supply over the past year, but signs that the bottom has been put in are flashing, and traders are taking notice.

Corn, wheat, and soybeans are all coming off multi-year low levels as the fundamental backdrop shifts from very bearish to just a little bearish. Will the shifting, albeit still bearish fundamentals, allow these agricultural commodities to put in more gains?

Wheat recovers off lows following WASDE

If you were trading wheat futures (/ZW) on Monday morning, you saw a market breaking into its lowest levels since August 2020, but prices started to rally into the afternoon, and wheat prices are up 1.81% on the week as of March 12, its best weekly performance on a percentage basis since December 2023.

Chicago SRW wheat futures and Kansas City futures, when combined, show the largest short position among speculators since mid-2019, according to the Commitments of Traders report (COT) from the Commodities Futures Trading Commission (CFTC).

The elevated short position leaves prices exposed to a potential short rally and highlights the fact that shorts may not have much more patience to stay in the trade.

Another development to consider is changes in the latest WASDE report from the United States Department of Agriculture (USDA). Global ending stocks were lowered by 0.6 million tons to 258.8 million tons, per the WASDE, which was released on Friday.

At the same time, global consumption was upped to 799 million tons.

Corn follows a similar pattern

Corn is following a similar pattern to wheat, with prices coming off a bottom in February when prices briefly broke below the 400’0 level. Now prices are up nearly 3% this month, putting it on track to break a 3-month losing streak. That bottom is also coming off the lowest level since November 2020.

Does the WASDE data support a fundamental case for the bottom being in? The U.S. outlook was unchanged in the report, but globally, coarse grain production for 2023/24 was forecasted at 2.8 million tons to the downside at 1,507.4 million tons. Ending stocks were also trimmed, with declines in production coming from South Africa, Ukraine, Mexico, and Russia.

Given the extreme price levels, this might support some further upside in the short term.

Similar to wheat, corn trader positioning is also at extreme levels. While shorts reduced their exposure slightly last week, short speculators have the largest position since April 2019, putting a short-covering rally on the cards. Wheat, Corn And Soybeans Prices Come Off Lows After WASDE_1

Wheat, Corn And Soybeans Prices Come Off Lows After WASDE_1

Soybeans the best bet for March?

Soybean futures (/ZSH4) are up nearly 5% this month in the best performance so far on a monthly percentage basis since February 2022. The commodity is coming off the lowest levels since November 2020 and looks poised to offer the best chances for a trend reversal out of the three commodities discussed in this article.

Globally, oilseed production was trimmed by 0.7 million tons to 658.7 million tons, and the 2023/24 soybean supply estimates were for lower beginning and ending stocks and lower production.

Global ending stocks for soybeans were cut by 1.8 million tons to 114.3 million tons, with higher Chinese stocks partially offsetting lower Brazilian stocks. Wheat, Corn And Soybeans Prices Come Off Lows After WASDE_2

Wheat, Corn And Soybeans Prices Come Off Lows After WASDE_2

Source:tastylive

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Thomas

Commodity

India’s oil demand in the year 2024 is expected to see a growth of 220,000 barrels per day to reach 5.57 million barrels per day, up 4.19% from 2023, as per an estimate by OPEC.

In its latest oil market report, the grouping attributed the forecast to improved investment environment and economic activity, and highlighted that the growing demand will be supported by increased consumption of diesel and other petroleum products.

The demand will further be supported by the annual traditional festivities which are expected to support transportation activity and boost gasoline demand, while the ongoing air travel recovery is expected to bolster jet or kerosene demand.

“Diesel is expected to be the driver of oil demand growth, supported mostly by agriculture, construction and manufacturing activities,” OPEC said. “Overall, India is expected to see healthy oil demand growth of 220,000 barrels per day on-year in 2024.”

Moreover, the country’s oil demand in January surged by 386,000 barrels a day on year, up from 133,000 barrels per day witnessed in the previous month, according to data from OPEC. The increase in demand is attributable to the rising consumption of the petroleum products including bitumen which is used for road construction.

India’s requirement for gasoline increased by 75,000 barrels per day on year due to heightened mobility levels. “Continued strong vehicle sales, which increased by 15%, on-year, in January, also contributed to rising gasoline demand.” LPG consumption, too, rose by 72,000 barrels per day from last year.

The country is expected to witness the current positive momentum of economic activity in the near term. “This will be largely driven by robust investment and services amid an expected surge in the manufacturing and construction sectors brought on by government spending and an improved investment environment, which are expected to support India’s oil demand in the first half of 2024,” the report said.

In 2025, OPEC expects India’s oil demand to rise by an average of 228,000 barrels per day on the back of healthy economic growth amid steady manufacturing and business activities. “Demand for transportation fuels and petrochemical feedstock is expected to remain healthy and support oil demand over the year.”

Furthermore, the organisation has kept the world oil demand growth forecast unchanged at 2.2 million barrels per day from last year taking the global oil demand at 104.5 million barrels per day in 2024.

“In 2025, global oil demand is expected to see robust growth of 1.8 million barrels a day, year-on-year. The OECD is expected to grow by 0.1 million barrels a day, on-year, while demand in the non-OECD is forecast to increase by 1.7 million barrels a day.”

Oil production in one of the world’s largest oil suppliers, Russia, is projected to see the largest decline in 2024 by 180,000 barrels a day followed by Mexico with a 50,000 barrels a day reduction in output. The key drivers of non-OPEC supply growth are forecast to be the US, Canada, Brazil and Norway. The estimated reduction in oil supply from Russia may hurt India’s imports of crude oil as Russia has emerged as the top supplier of crude to India post the outbreak of Russia-Ukraine conflict.

Source: The Financial Express

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Cohen

Economic

Underlying US inflation topped forecasts for a second month in February as prices jumped for used cars, air travel and clothes, reinforcing the Federal Reserve’s cautious approach to cutting interest rates.

The so-called core consumer price index, which excludes food and energy costs, increased 0.4% from January, according to government data out Tuesday. From a year ago, it advanced 3.8%.

Economists see the core gauge as a better indicator of underlying inflation than the overall CPI. That measure climbed 0.4% from January and 3.2% from a year ago, boosted by gasoline prices, Bureau of Labor Statistics figures showed. US Core Inflation Tops Forecasts Again, Reinforcing Fed Caution_1

US Core Inflation Tops Forecasts Again, Reinforcing Fed Caution_1

After a brisk January reading, the report adds to evidence that inflation is proving stubborn, which is keeping central bankers wary of easing policy too soon. Chair Jerome Powell suggested last week that he and his colleagues are getting close to the level of confidence they need to start lowering rates, but some officials have expressed they’d like to see a broader pullback in prices first.

Core CPI over the past three months rose an annualized 4.2%, the most since June.

“This will probably be seen as a reason to keep policy on hold a while longer,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “Through the volatility, the downtrend in inflation seems to be leveling off and the Fed would like to see it continue to move lower before easing rates.” US Core Inflation Tops Forecasts Again, Reinforcing Fed Caution_2

US Core Inflation Tops Forecasts Again, Reinforcing Fed Caution_2

The market reaction was choppy. Traders initially focused on key details that suggested there are some pockets of relief on inflation, before seemingly turning to the robust headline figures. Treasury yields rose, while the S&P 500 opened slightly higher.

Other than the upcoming release of the producer price index, this is the last major inflation report the Fed will see before its meeting next week. With policymakers expected to hold interest rates steady for a fifth straight meeting, economists will be looking for clues as to when the central bank will start lowering borrowing costs.

Traders still saw June as the likely first rate cut, but pulled those bets back somewhat.

What Bloomberg Economics Says...

“Even as February’s core CPI remained hot, it’s somewhat comforting that January’s jump in OER proved to be a one-off, and the trend in shelter remains for disinflation. More troubling is the fact that core goods disinflation appears to have stalled.”

— Anna Wong and Stuart Paul.

Shelter and gasoline contributed over 60% of the overall monthly advance, the BLS said. Prices also picked up for used cars, apparel, motor-vehicle insurance and airfares — which posted the biggest monthly advance since May 2022.Shelter prices, which is the largest category within services, climbed 0.4%, slowing down from a big jump in January. The same was true for owners’ equivalent rent — a subset of the shelter category, which is the largest individual component of the CPI.

The metric — which tracks hypothetical rents paid by homeowners — made headlines in recent weeks after the BLS suggested a methodological adjustment was a large factor behind the robust reading of the January CPI. Rent of primary residence rose 0.5%, the most since October.

Excluding housing and energy, services prices advanced 0.5% from January, stepping down from 0.8% in the prior month, according to Bloomberg calculations. While policymakers have stressed the importance of looking at such a metric when assessing the nation’s inflation trajectory, they compute it based on a separate index.

That measure, known as the personal consumption expenditures price index, doesn’t put as much weight on shelter as the CPI does. That’s one reason why the PCE is trending much closer to the Fed’s 2% target. PCE figures for February are due later this month.

Unlike services, a sustained decline in the price of goods over most of the past year has been providing some relief to consumers — but that may be starting to change. So-called core goods prices, which exclude food and energy commodities, rose for the first time since May.

Policymakers have also been hesitant to cut interest rates given the strength of the labor market. A separate report Tuesday showed real earnings continued to rise on an annual basis, extending a months-long streak in which wage growth has modestly outpaced inflation.

Source:Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Forex

Central Bank

The Australian and New Zealand dollars were robbed of momentum on Wednesday after an unwelcome, if modest, upside surprise in U.S. inflation pushed up Treasury yields and triggered losses for local bonds.

Investors reacted by further paring the chance of a rate cut from the U.S. Federal Reserve in June to 68% from 73%. A month ago, markets had priced in a 90% chance of a June easing.

The broader shift has been echoed in Australia where the chance of a quarter-point cut in the 4.35% cash rate in June is 50-50, and August is now the preferred month with an implied probability of 90%.

The Reserve Bank of Australia's (RBA) next policy meeting is on March 19 and markets show almost no chance of a change in rates, and only limited speculation it might abandon a bias toward tightening.

"We see the RBA shifting to a neutral stance by the May meeting," said Adam Boyton, head of Australian economics at ANZ.

"We continue to favour a November start to the rate cut cycle, although current evidence of inflation moderating raises the risk of an earlier start to the easing cycle."

The next reading for February inflation is due on March 27 and, since it includes a broader range of services than the January index, could see annual inflation edge up from 3.4%.

Over in New Zealand, there was mixed news as food prices fell 0.6% in February, unwinding some of January's jump and pulling annual food inflation to its lowest since May 2021 at 2.1%. Food makes up almost 19% of the consumer price basket.

However, that was offset by a jump in travel costs and overseas accommodation which muddies the outlook for the CPI for all of the first quarter.

In the forex market the Aussie was holding at $0.6606, having dipped as deep as $0.6583 after the U.S. data. Support lies around $0.6562 with resistance up at $0.6667.

The kiwi dollar was flat at $0.6147, after easing 0.3% overnight to as low as $0.6136. Support comes in around $0.6125 and major resistance at $0.6217.

Australian bonds also took a knock from the U.S. data, with three-year bond futures back at 96.360 after losing almost 6 basis points on Tuesday.

New Zealand two-year swap rates edged up 2 basis points to 4.85%, but remain well below the 5.26% peak hit last month.

Source: Reuters

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Commodity

Cryptocurrency

Gold and bitcoin go through the roof

It’s pretty rare to see gold and bitcoin setting new record highs at the same time. Gold is considered the ultimate safe haven asset, while bitcoin is often viewed as one of the riskiest and most speculative plays. When both of them stage an incredible rally, it sends mixed signals about the mood in global markets.

Yet, the catalysts behind each rally are quite different. The only common characteristic is that both gold and bitcoin have benefited from speculation that the Fed is about to slash interest rates. Aside from that, each asset has been driven higher by its own unique forces.

Gold has been turbocharged by direct purchases from central banks, with China leading the charge. Beijing is trying to diversify its reserves away from the US dollar, after the US weaponized the dollar in its sanctions against Russia. China is worried about suffering the same fate in case its relations with America deteriorate. Why Are Gold And Bitcoin Hitting New Records Together?_1

Why Are Gold And Bitcoin Hitting New Records Together?_1

Chinese consumers have gone on a buying spree as well, searching for protection from the crash in the nation’s property and equity markets. This local demand for gold is evident when comparing prices - gold in Shanghai is trading at a significant premium over the same gold in London.

Safe haven flows have been another source of fuel for gold prices. The geopolitical landscape is unstable and some investors might also be buying gold as a hedge against a recession, as economic growth is losing steam in several regions.

What’s behind Bitcoin’s ascent?

In the crypto arena, bitcoin has enjoyed increased interest from institutional investors following the launch of spot ETFs last year. These contracts have granted the ‘big players’ easier and safer exposure to the famous coin.

One signal that bitcoin's ascent is being driven by ‘smart money’ is that smaller alternative coins are nowhere close to their own record highs. Hence, investors are displaying a clear preference for higher quality and less volatile crypto holdings, rather than simply chasing gains. Why Are Gold And Bitcoin Hitting New Records Together?_2

Why Are Gold And Bitcoin Hitting New Records Together?_2

Similarly, gold can still draw support from interest rates falling. Speculation around rate cuts has pushed bond yields lower, which has boosted the yellow metal that pays no yield to hold. But yields are still quite high from a historical perspective, trading near their highest levels in a decade. This suggests gold can still capitalize on yields falling back to more ‘normal’ levels, particularly if the US economy weakens, forcing the Fed to slash interest rates deeper and faster.

As for bitcoin, the outlook still appears positive ahead of the halving event on April 20th, which in previous instances has benefited prices. At the same time, the king of crypto is increasingly entering institutional portfolios as an alternative asset. Even if it makes up only a tiny fraction of such portfolios, those inflows are still significant for a market as small as crypto.

That said, there might be an even stronger bull case for Ethereum, the second biggest cryptocurrency. Ethereum is still 17% below its own record highs, but with spot ETFs on the horizon, it might be only a matter of time until it attracts the same ‘smart money’ flows as bitcoin did recently.

Applications for spot Ethereum ETFs are still pending approval by US regulators, which could be granted later this year.

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