Market Briefing: Markets Inch Higher After Post-Inflation Weakness
North American equity futures look set to rebound from yesterday’s losses this morning, with a broad-based improvement in risk appetite helping to send the dollar lower against all of its G10 rivals. Treasury yields are inching up, oil is slipping, and economically-sensitive currencies are posting incremental gains.
The Bureau of Labor Statistics yesterday reported headline price growth eased to a two-year low in March. Markets initially reacted well, but with measures of core inflation remaining elevated, investors ultimately raised odds on a rate hike at the Fed’s next meeting in early May, and major equity indexes retreated.
Losses worsened later in the day when minutes from the central bank’s last meeting showed that—although problems in the banking sector dominated discussion—officials ultimately remained convinced “some additional policy firming" would be needed once the crisis had passed. The “terminal rate” implied in markets climbed back above the 5 percent threshold, and rate differentials widened slightly in the dollar’s favour, even as staff forecasts suggested the economy would enter a “mild recession” later this year.
Spirits improved overnight when China reported a surprisingly-strong jump in exports, suggesting that global demand could prove more robust than previously thought. According to the National Bureau of Statistics, exports grew 14.8 percent year-over-year in March, bouncing back from a 6.8-percent contraction in January and February. Shipments to Russia and Southeast Asia jumped, while US and European markets showed signs of stability. Earnings from LVMH Moët Hennessy Louis Vuitton later showed a solid improvement in domestic demand, with Chinese consumers splashing out on luxury goods in the first quarter.
The euro is trading on a stronger footing, pushing above the 1.10 mark after surprisingly-positive industrial production numbers for February boosted first-quarter growth expectations. Falling energy costs and a sharp improvement in supply chains helped generate a 1.5-percent increase in industrial output in the month - adding to a 1-percent jump in January, and suggesting that factories are humming even as broader consumer demand remains weak.
The Canadian dollar rallied in Asian trading hours last night, presumably as investors processed the implications of the Bank of Canada’s decision earlier in the session. With growth and inflation projections moving in favourably-opposed directions, policymakers opted to keep rates unchanged while maintaining a hawkish bias on further increases. In post-announcement comments, Governor Macklem said“based on the information we have today, the implied expectation in the market that we're going to be cutting our policy rate later in the year, that doesn't look today like the most likely scenario to us”. Odds on a rate cut by December are down modestly.
The exchange rate is now trading through its 200-day moving average, and there is little in the way of meaningful technical resistance between here and the year’s loonie highs (greenback lows) - around the 1.3270 area. If volatility in fixed income and equity markets continues to subside, the loonie could strengthen - even as its longer-term fundamentals remain deeply questionable.
Today will bring Producer Price Index data for March, with economists expecting a flatlining in the month-over-month print as supply chains continue to stabilize. New applications for unemployment benefits are seen increasing to 232,000 in the week ended April 8, up modestly from the 228,000 claims reported a week earlier.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
@KARL_SCHAMOTTA
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