Market Briefing: Markets Retreat as Event Risks Loom
Markets are suffering from a post-Easter sugar withdrawal this morning, with the dollar rising on a broad-based deterioration in risk appetite, and major North American equity bourses looking set to give back some of yesterday’s gains at the open. With a critical measure of inflation pressures set for release tomorrow and major US banks gearing up for earnings reports later in the week, Treasury yields are slipping, with the two-year falling below 4 percent once again.
After a raft of better-than-expected data in recent weeks, current pricing suggests markets think the Federal Reserve will hike rates once more in early May, but will then cut at least twice in the back half of the year. We find this difficult to understand—although a downturn looks quite likely, a sufficiently rapid and catastrophic rise in unemployment seems much less plausible—but the impact on rate differentials has helped weaken the dollar in currency markets.
Today’s economic agenda looks relatively subdued, with no major releases scheduled beyond an update in the International Monetary Fund’s World Economic Outlook database (which is catnip for nerds, but far less interesting to the practical types who dominate financial markets). The Chicago Fed’s Austen Goolsbee will speak this afternoon, followed by Philadelphia’s Patrick Harker and Minneapolis’ Neel Kashkari.
Tomorrow will heat up considerably, with March consumer prices, a Canadian rate decision, and minutes from the Fed’s last meeting set to keep things interesting in financial markets.
Investors expect a deceleration in headline consumer prices, but evidence of stubbornly-high core inflation isn’t likely to deliver relief for monetary policymakers. All-items inflation is seen running at 5.1 percent year-over-year, down from 6.0 percent in February on a short-lived drop in energy benchmarks. With energy and food categories excluded, prices likely rose 5.6 percent year-over-year, marking the first time the core measure has exceeded the headline since January 2021.
No one expects the Bank of Canada to move, but officials could maintain a relatively-hawkish bias in the accompanying statement and Monetary Policy Report. After announcing a conditional pause in January, the central bank is widely seen maintaining the overnight rate at 4.50 percent through the early part of the year, even as incoming data suggests the economy is outperforming almost anyone’s expectations. 35,000 jobs were created in March, and hourly wages for permanent workers climbed 5.2 percent—a pace that suggests services inflation is still going strong—consumer spending and exports remain robust, and real-time data suggests gross domestic product is expanding at a 2.5-percent annualized pace, well above the official projections generated in January. We suspect pain is coming for the Canadian economy, but it certainly isn’t showing up in the data yet.
Minutes from the Fed’s March 21-22 gathering shouldn’t rock markets. Jerome Powell clearly flagged some dovish rumblings during the post-decision press conference, and the record should show that only a “few” participants argued for a pause, even as the majority of the committee remained focused on signs of surprising resilience in growth and inflation. Economists may focus on how policymakers saw regional bank turmoil impacting financial conditions, but traders have largely priced that in at this point, with weaker lending expected to slow the economy in coming months.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
@KARL_SCHAMOTTA
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