Market Brief: Markets Batten the Hatches Ahead of Inflation Report

CalendarApril 9, 2024
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Tensions in currency markets are growing ahead of tomorrow’s US consumer inflation report. Most major pairs look deceptively rangebound as traders gear up to sell the greenback against the yen, euro, and Canadian dollar, among others, if an on-consensus (or weaker) print keeps three Federal Reserve rate cuts in play for this year -or sell everything else against the dollar if price gains surprise to the upside.

Treasury yields are inching lower after hitting the highest levels since November during yesterday’s session. The New York Fed’s March Survey of Consumer Expectations suggested that progress in bringing inflation expectations down has stalled, with households seeing inflation a year from now at 3 percent, unchanged from February. The expected level of inflation three years from now rose to 2.9 percent from 2.7 percent, and in five years, inflation was seen at 2.6 percent, down from the prior month’s 2.9 percent.

The Canadian dollar is holding steady near the bottom of its year-to-date trading range as long-standing domestic vulnerabilities interact with a sharp turn in sentiment on the greenback. Dollar bulls remain in the ascendant for now, with last week’s Commitments of Traders data showing net speculative dollar long positions jumping by $2.4 billion to $16.1 billion in the week ended April 2, representing the biggest net position since September 2022. Until something slows the stampede - perhaps a softening in US data or a recovery in the rest of the world, currencies like the loonie are vulnerable to trampling.

Tight financial conditions took a toll on credit growth in the euro area in the first quarter, highlighting the bloc’s growing underperformance relative to the United States. According to the European Central Bank’s quarterly Bank Lending Survey, banks reported a “substantial decline” in demand for corporate loans, a small drop in demand for mortgages, and a stabilisation in other forms of consumer credit as “higher interest rates, as well as lower fixed investment for firms and lower consumer confidence for households” kept spending plans depressed.

Talk of a move to parity between the euro and dollar by the end of this year has grown louder, with Bloomberg noting this morning that - although such a move isn’t anyone’s base case - a number of money-centre banks are preparing for the possibility. Nothing can be ruled out, but we are sceptical, given that rising energy prices - which would keep the Fed on hold - are also likely to translate into higher inflation in the euro area. We suspect that the prospect of a second, smaller energy shock could embolden the hawks on the ECB Governing Council, and lead Madame Lagarde to slow-walk the pace of expected rate cuts beyond the June starting point.


Still Ahead

WEDNESDAY

The March US consumer price index report is expected to show the disinflationary process continuing at a painfully-slow pace. The headline all-items index is seen rising 0.4 percent month-over-month, maintaining February’s intensity on a rise in gasoline prices, while the core measure comes in at 0.3 percent - down from 0.4 percent in the prior month, but still well above the Fed’s comfort zone on a year-over-year basis. We think Jerome Powell’s preferred “supercore” measure - core services, excluding housing - should moderate somewhat, helping to alleviate fears of a reacceleration in underlying pressures. If we’re wrong, another overheated print could trigger a renewed rise in the dollar. (08:30 EDT)

The Bank of Canada is overwhelmingly likely to leave policy settings unchanged for a sixth consecutive meeting, but its messaging could prove more hawkish than many of us might have expected only a month ago. We suspect that last week’s disappointing jobs data is unlikely to translate into explicit easing guidance, especially given that first-quarter gross domestic product is tracking well above January’s projections, long-term inflation expectations are inching higher, and housing markets are looking poised for a spring melt-up. Officials - already wary of triggering a burst of irrational exuberance in bond markets and among Canadian consumers - could remain stubbornly non-committal on the likelihood of rate cuts this summer. (09:45 EDT)

Minutes taken during the Federal Reserve’s March meeting could also convey an uncomfortably hawkish tone, foreshadowing the stronger-than-anticipated data that has come out in the intervening weeks. Markets interpreted the “dot plot” summary of economic projections through a dovish lens at the time, given that policymakers avoided marking down the number of expected rate cuts this year, but it is clear that the balance of opinion was shifting toward a more gradual easing trajectory. Since the meeting, fourth quarter gross domestic product was revised higher, core personal consumption expenditures inflation came in above expectations, and the US jobs-creation engine accelerated, raising deep questions over the extent to which Fed policy is restricting economic activity. (14:00 EDT)

THURSDAY

European Central Bank officials have clearly telegraphed a summer rate cut for months, creating the conditions for an uneventful market reaction to this week’s decision. No new forecasts will be provided, but with markets assigning 97 percent odds to a move at the June meeting, and three more cuts expected by year end, we suspect investors might react negatively to signs of gradualism in Madame Lagarde’s comments. European core inflation prints have begun surprising to the upside, and oil prices are soaring, suggesting - to us, at least - that policymakers might want to begin walking autumn easing expectations back a bit. (08:15 EDT)

Producer prices - which form part of the basis for the Federal Reserve’s preferred personal consumption expenditures measure - are seen slowing to 0.3 percent in March from the overheated 0.6-percent month-over-month pace set in February, but higher commodity costs could deliver a surprising overshoot. Market reaction could be significant either way. (08:30 EDT)

See our Economic Calendar for a complete listing of upcoming data releases.

Author

Karl Schamotta

Karl Schamotta

Chief Market Strategist

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