Markets
Friday’s bearish engulfing pattern at record levels for the S&P 500 and Nasdaq (potential short term trend reversal) met with some more weakness in futures trading and at the opening bell, but follow-up losses remained contained to 0.11% and 0.41% respectively as some investors are still looking to buy into every minor dip. Adding evidence on the other side of the scale (room for larger correction) is the weak final hour we’ve been seeing over the last couple of sessions. The jury remains out, but we hold it on our radar as potential bigger market driver (risk sentiment) in trading days ahead. Today’s focus is on February US CPI inflation figures. Headline and core inflation are expected at 0.4% M/M and 0.3% M/M respectively with annual measures stabilizing at the top level (3.1% Y/Y) and forecast to slide to the lowest level since April 2021 for the core reading (3.7% Y/Y from 3.9% Y/Y). That’s because of relatively high comparison bases last year and probably limits scope for any upward surprises. From a (bond) market point of view, we believe that investors could be enticed to add to speculative May Fed rate cuts bets in case of a below of in-line-with consensus outcome. Such expectations re-entered markets last week after Fed Chair Powell on his second day of testimony’s before US Congress said that the Fed isn’t far from reaching the confidence level needed (on inflation) to start making monetary policy less restrictive. US Treasuries can in such scenario revisit last week’s highs (or better). The NY Fed ‘s February Survey of consumer expectations yesterday created some room to maneuver. One-year inflation expectations remained unchanged at 3%, with medium (3-yr) and long term (5-yr) expectations increased significantly: from 2.4% to 2.7% and from 2.5% to 2.9% respectively. US Treasury yields yesterday rebounded by 0.8 bps (30-yr) to 6.1 bps (2-yr). US Treasuries underperformed German Bunds (yields 2.6 bps to 4.4 bps higher), triggering a minor setback in EUR/USD (1.0926 from 1.0940). USD/JPY slightly rebounds this morning (147.50) after a BoJ-normalization induced JPY-rally. Latest rumours suggest that the board is split between March and April on ending its negative interest rate policy with Friday’s outcome of annual wage negotiations being pivotal. Sterling this morning loses ground on just-below consensus labour market data. The unemployment rate ticked up to 3.9% with average weekly earning rising by 5.6% 3M/YoY. February job growth rose by 20k following a downward revision in January. EUR/GBP moves back to 0.8550 after last week’s failed test of 0.85 support.
News & Views
The Central Bank of Argentina yesterday unexpectedly reduced its benchmark interest rate from 100 % to 80%. In January, CPI inflation was reported at 20.6% M/M and 254.2% Y/Y. Policy makers apparently see a cooling in monthly inflation, rebuilding of reserves and a rise in the parallel exchange rate of the peso as a good enough reason to ease policy already. February inflation data will be published later today (15% M/M and 282% Y/Y consensus). The move is also a bit surprising as the IMF in its latest review indicated that Argentina’s authorities agreed that the monetary policy stance needs to be tightened to support disinflation. Yesterday, the government also launched a voluntary debt swap of peso and dollar-linked debt instruments with a total value of around $65bn. Instruments maturing in 2024 can be changed for new inflation-linked instruments with maturities between 2025 and 2028 as the country tries to delay repayments on its debt.
Australian business conditions improved in February to 10 from 7. In its assessment, NAB says that the economy remained resilient in the new year and inflation is still a challenge despite slowing growth. Trading conditions and profitability pushed business conditions back above their long-run average – though conditions softened further in retail and construction, sectors that are particularly exposed to the ongoing impact of tighter monetary policy. Despite signs of resilience, NAB mentions that business confidence and forward orders both eased to remain mired at low levels. Capacity utilisation also eased. Businesses continue to report elevated rates of cost growth (both labour and materials inputs) and it appears that firms still have scope to pass some costs to consumers. Retail price growth, in particular, rose sharply to 1.4% Q/Q in a sign that further progress on inflation is unlikely to be smooth over the months ahead. Markets currently still see a first RBA rate cut in August.
