Market Brief: Price Action Muted As Inflation Worries Re-Emerge

CalendarMarch 15, 2024
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Chastened investors are heading into the weekend on a cautious footing after two inflation readings suggested that price pressures in the US economy remain stubbornly elevated, further undermining hopes the Federal Reserve could soon begin cutting rates. Markets tumbled during yesterday’s session after data showed producer prices increased in February by the most in six months as the cost of goods like gasoline and food surged. According to the Bureau of Labor Statistics, the producer price index for final demand increased 0.6 percent from January, up 1.6 percent from a year earlier, marking the fastest annual advance since September. Consumer price numbers earlier in the week showed underlying inflation - particularly the “supercore” measure followed by Fed chair Jerome Powell - topping expectations for a second month.

Higher yields are supporting the greenback, putting other major currencies on the defensive and weighing on risk-sensitive asset classes. Ten-year Treasury yields are holding near 4.28 percent, up sharply on the week, equity futures are pointing to a muted session, and both oil benchmarks are holding near four-month highs as the global demand outlook brightens.

Investors are now expecting three rate cuts by year end, down from almost seven in mid-January, and closely aligned with the median estimate provided by Fed officials in December. On the face of it, this should reduce odds on a violent reaction after next week’s decision, but with a significant number of investors convinced that the median estimate will fall, positioning changes could easily trigger turbulence in fixed income and wider currency markets.

Odds on a rate hike at next week’s Bank of Japan meeting firmed after the country’s largest trade union federation this morning said annual wage deals had come in stronger than expected, adding to inflation pressures in an economy that has remained moribund for decades. The Rengo trade union group announced a 5.28-percent initial tally of wage negotiation results, up sharply from the 3.8 percent registered in last year’s round, and slightly above market forecasts for a circa-5-percent gain. The results are preliminary, and will be subject to several revisions, with a more conclusive tally likely available by mid-April. The yen initially climbed, but fell back in the face of a resurgent dollar, and is now trading near levels that prevailed ahead of the announcement.

Today’s agenda looks relatively tame: The US will publish import/export prices at 8:30 and industrial production numbers for February at 9:15, followed by an update in the University of Michigan’s consumer sentiment index at 10:00. Markets think ex-petroleum import prices fell 0.5-percent in February, suggesting that disruptions in the Red Sea are having a relatively minor impact on the US economy - but rising oil prices probably pushed the overall index into modestly-positive territory.

But an action-packed week beckons: the Reserve Bank of Australia, Bank of Japan, Federal Reserve, Bank of England, and Banco de Mexico will all deliver rate decisions, Canada will publish its latest inflation update, and a raft of Chinese activity data could help shed light on how demand has evolved in the early part of the year. Market volatility should rise from today's unusually-suppressed levels.


Still Ahead

MONDAY

The Reserve Bank of Australia has kept traders on their toes for months, but looks likely to deliver a fairly boring decision in March. After having raised the cash rate target by 425 basis points in this tightening cycle, policymakers look likely to maintain a hawkish bias even as they acknowledge signs of softness in labour markets and consumer spending, helping ratify market expectations for a third- or fourth-quarter pivot toward lower rates. (23:30 EDT)

TUESDAY

Markets are increasingly convinced the Bank of Japan will deliver its first hike in 17 years at the March meeting, with elevated wage growth seen overriding weak economic data in presenting a compelling reason to normalise rates. We’re unsure - while the timing is likely fairly optimal, it isn’t clear that the country is yet generating the sort of demand-driven inflation that typically necessitates a tightening in financial conditions. A revision in the Bank’s forward guidance that gives policymakers the option to exit negative rates in April seems more likely. (02:00 EDT)

Headline inflation likely snapped higher in Canada last month, with the Bank of Canada’s preferred core measures remaining stubbornly elevated. Beyond the still-overheated shelter categories, wage pressures continue to rise, services costs are holding firm, and disinflationary forces on the goods side of the equation are looking shaky as gasoline prices climb and trade disruptions reemerge. Speaking to the press just after the March meeting, Governor Macklem said “Looking ahead, we continue to expect inflation will be close to 3 percent through the middle of the year before easing in the second half”.(08:30 EDT)

WEDNESDAY

British inflation is on a clear downward trajectory, with markets expecting the increase in consumer prices to slow to 3.5 percent year-over-year in February, down from 4 percent in the prior month. Core price growth should remain somewhat more elevated, coming in at roughly 4.5 percent, down from 5.1 percent previously - not yet near the Bank of England’s comfort zone, but clearly headed toward it. (03:00 EDT)

A record of the Bank of Canada’s early-March meeting could deliver insight into the factors that led policymakers to rule out easing in April, and might provide some colour on the quantitative tightening debate playing out behind the scenes. In the post-meeting press conference, Governor Macklem said “Governing Council remains concerned about the persistence of underlying inflation, and we want to see a further deceleration in core inflation in the coming months” - language that clearly anchored rate cut expectations further out - and noted that overnight repo operations were reducing stress in funding markets, saying “Our view on our QT (quantitative easing) strategy hasn't really changed significantly”. (13:30 EDT)

The Federal Open Market Committee will almost certainly leave the Fed Funds target in the 5.25-to-5.5 percent range for a fifth consecutive meeting and its forward guidance should remain basically unchanged, but the “dot plot” summary of economic projections could generate some drama. Most observers expect officials to pencil in a total of three rate cuts in the remainder of the year - the same as in December - but after a series of hotter-than-anticipated data releases, a significant minority think the number could be reduced to two. Markets could experience a relief rally if this fear goes unrealized. (14:00 EDT)

THURSDAY

The Bank of England is overwhelmingly likely to leave its policy rates and forward guidance unchanged for a fifth consecutive meeting, but officials could continue to edge in a more dovish direction. Monetary Policy Committee members are gradually moving toward Swati Dhingra’s position, with slower inflation and wage growth numbers helping to silence calls for still-higher rates. (08:00 EDT)

Officials at the Banco de Mexico could vote by a narrow margin to cut key interest rates for the first time in three years, but should stick with guidance that sets out an extremely gradual easing trajectory ahead. With inflation subsiding at a rapid clip, Mexican real interest rates are the highest in Latin America, imposing a speed limit on the economy, while also helping support the carry trade that has made the peso one of the world’s best-performing currencies in the last few years. (15:00 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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