Hey folks, markets are pulling back as per our expectations. Get my take on where to next in this week’s round-up.
MARKET SOUND BITES:
This past week started out rough and it never really got better with US Indexes recording their third consecutive week of broad losses, as concerns over tensions in the Middle East and the possibility of U.S. interest rates remaining “higher for longer” appeared to weigh on sentiment. And if uncertainty continues to rise—whether because of inflation, interest rates, or the U.S. presidential election—that could drive volatility, too. This past week we also so that pension funds were expected to pull $325 billion from the equity markets in 2024, nearly the double $191 billion in outflows reported in 2023. The S&P has slipped below it’s 50 Day moving average and typically it goes on to drop another 5% over the near term.
Some strong economic data appeared to increase worries that the Federal Reserve would push back any interest rates cuts to the fall, if not to 2025. On Monday, the Commerce Department reported that retail sales rose 0.7% in March, well above consensus expectations of around 0.3%, while February’s gain was revised upward to 0.9%. The retail sales data helped push the yield on the benchmark 10-year U.S. Treasury note to its highest intraday level since early November. In addition, CPI rose 3.5% year-over-year in March, which was slightly higher than economist expectations and marked an acceleration from February’s 3.2% print.
As was the case the previous week, Fed officials expressed their concern with recent economic data. On Tuesday, Fed Chair “Boom Boom” Powell stated, “recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.” In addition, New York Fed President John Williams warned that a rate hike is not the baseline, but that one is possible if the data warrants while the Atlanta Fed President Raphael Bostic said that policymakers would not be able to cut rates until the end of the year. Markets immediately started dialing back bets for rate cuts in 2024. One month ago, markets were expecting about 100 bps cuts in 2024, with many expecting the first cut at the next Fed meeting on May. After the CPI release, these expectations were slashed to 40 basis points for the year or slightly less than two moves. If the Fed is forced to go in the other direction—raising rates instead of cutting them because of a negative inflation surprise—we could see this impact risk assets adversely. In my view, this is a tail risk in 2024, not a prominent one.
CPR in the UK grew an annual 3.2% in March, down from 3.4% in February. The decline was slightly less than forecast. Services inflation remained high but slowed to 6.0% from 6.1%. Higher oil prices and the somewhat sticky inflation data prompted financial markets to push out expectations for a first cut in UK interest rates from June to sometime in the fall. Meanwhile, a slew of ECB policymakers at the IMF meeting reiterated that June was the likely target date for lowering borrowing costs, barring unexpected economic shocks.
In Japan, the yen, perceived as a safe-haven currency especially in times of geopolitical turmoil, strengthened on the final trading day of the week. It nevertheless continued to hover around 34-year lows and finished the period in the mid-JPY 154 against the U.S. dollar range, from the low-JPY153 range at the end of the previous week. Japan’s exports rose 7.3% year on year in March, slightly slower than the 7.8% gain registered in February. This marked the fourth consecutive month of growth in exports, attributable to the boost provided to Japan’s exporters by historic weakness in the yen.
China’s GDP expanded an above-consensus 5.3% in the first quarter from a year ago, accelerating slightly from the 5.2% growth in last year’s fourth quarter. On a quarterly basis, the economy grew 1.6%, rising from the fourth quarter’s 1.4% expansion. Industrial Production and Retail sales grew at lower-than-expected rates. And on a monetary front the PBOC injected more stimulus into the banking system. And finally, new home prices continued to fall in March acting as a drag on the overall Chinese Economy.
Enjoy This Week’s Round-Up;
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Trade Smart !
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