What happened last week.
(A forex, index, and commodity market review)
A surprise jump in US inflation last month put paid to any lingering hope that the FED could cut interest rates more than the three cuts that the FOMC planned.
US equity markets now expect the Fed to cut rates three time this year, starting at the June meeting.
Weekly change (amount change and percentage change on the week)
FTSE +108 +1.41%
DAX +323 +1.82%
DOW +15 +0.04%
S&P Unchanged
NASDQ -200 -1.11%
NIKKEI -190 -0.48%
Hang Seng +376 +2.30%
US equities lost ground last week as stronger than expected inflation data forced traders and investors to capitulate on any lingering hopes for more than three rate cuts this year.
Last Tuesday the headline CPI inflation data reported inflation stronger than the consensus – up 3.2% annually versus 3.1% expected whilst the monthly rise was +0.4%. The Core CPI inflation rate, which strips out the more volatile energy and food components, was also stronger than expected at +0.4% versus 0.3% expected whilst the annual rate dipped to 3.8% from 3.9%.
The CPI data released last Tuesday did not trigger much of a reaction in stocks that day with all major US indices up on the day. The producer price index (PPI) that usually does not create much of a response also came in stronger than expectations which suggest that there could more price pressures feeding through in the weeks ahead. The Federal Reserve’s inflation target is 2% and this suggests hitting this target remains some way off with a degree of uncertainty.
Equity markets fell on the news whilst Friday’s prelim Michigan Consumer Confidence reading, which came in lower than expected, pushed stocks lower with all indices closing at their lows for the week. The CME Fed watch tool now implies investors and traders are expecting just three interest rate cuts this year compared to seven rate cuts at the start of 2024. The readjustment in expectations now brings the markets into line with FOMC forecasts, with the first rate cut expected in the June meeting although that timing seems less certain now with just a 59% probability compared with a 73% just a week ago.
European markets were in better shape with both the UK and German indices registering good gains, taking the German Dax further into record highs whilst the UK FTSE100 hit its highest level since the start of the year, although the 7,800 level continues to provide broad resistance to further gains.
UK markets, like their US counterparts, will be dealing with their central bank interest rate decision this week where forward swap markets continue to imply a lower probability of a rate cut anytime soon. Despite inflation expected to hit the Bank of England’s 2% target in the coming months, forward swap rates imply the first cut in the UK rates in August with just a further two by year end. Pay growth is a concern for the bank with annual wage growth at 6.1%, well above current inflation.
EURUSD -0.47 -0.43%
GBPUSD -1.23 -0.96%
USDJPY +1.94 +1.32%
The US Dollar recovered some lost ground last week as forward rate cut expectations dimmed. A recent survey of academic institutions reported that the first rate cut should be in September as opposed to the June rate cut that the markets expect. Political considerations come into play and that is why it is likely that the FED will opt for an earlier cut to ensure there is no accusation of political interference. President Biden would much prefer rate cuts as soon as possible but he is not responsible for controlling inflation.
Gold -21 -0.96%
UK OIL +3.26 +4.00%
US OIL +3.16 +4.08%
Gold fell in tandem with a strengthening US Dollar last week. Gold’s extreme moves the previous two weeks have confused analysts. Whilst the falls in the US Dollar since mid-February have contributed to the bull market, the hawkish move in the interest rate swap markets implying just three rate cuts this year, would normally be a drag on the gold price. The speculative interest, along with record highs in Bitcoin, may be the main cause of Gold’s record-breaking move.
Oil Continues to rally as there is no sign of any ceasefire between Israel and Hamas . The International Energy Agency (IEA) also changed its forecast on oil supply and demand. It had previously predicted a surplus in its last report in January but now expects demand to outstrip supply leading to a small deficit.
Data and events in the coming week
(What traders need to look out for in the week ahead)
A remarkably busy week for the markets with five key central bank interest rate decisions, cpi inflation data in the UK and readings on manufacturing and services sectors in the developed world.
Interest rates are a key driver in foreign change markets and have a direct effect on companies and individuals. Typically, if interest are stronger in one country compared to another, it will favour that country’s currency. For example if UK interest rates were expected to stay elevated for longer than August’s expected cut, sterling would react positively to this news as investors would continue to get a better return in Sterling for a longer period.
Monday
China
Industrial production and retail sales. Data from the state agency. Stronger than expected industrial production will be welcome news to Beijing.
Tuesday
Japan
Monetary policy update. The Bank of Japan is set to raise its key interest rate for the first time in 17 years on Tuesday following its two-day monetary policy meeting. Expectations are for the short-term rate to be increased to 0% – 0.1% . The BoJ is expected to end its yield curve control measures which keeps the 10-year Japan government bond yield below the 1% level. Tuesday is also a bank holiday in Japan, in celebration of the vernal equinox. I assume the BoJ is open. Japanese Yen extremely sensitive to this announcement.
Australia Reserve Bank of Australia. Interest rate decision. No change expected as rates are expected to be left on hold at 4.35% for the fourth consecutive month.
Wednesday
China
Update from PBOC on the 1 and 5-year loan rates. China tends to surprise the markets with these announcements, but no change is the expectation.
UK CPI inflation data. Headline expected at 3.5% annualised and 0.6% month on month. Core CPI expected at 4.6%, down from 5.1% last month. A key influence on the MPC meeting the next day. GBP and UK assets extremely sensitive to this release.
US FOMC. Interest rate announcement and policy update including projections. No change expected with clues about when the first rate cut will happen. Press conference to follow at 6:30pm which could be lively. USD, US, and global assets sensitive to this release.
Thursday
Switzerland
Swiss National Bank (SNB) policy update. No change in rates expected.
EU, UK & US Flash manufacturing and services PMI data. The first of two releases covering much of the developed world’s economies. A pickup in both sectors expected in the EU with both sectors slipping in the US. Considering the interest rate announcement this week, this data release will not have much of an impact.
UK Bank of England rate setting committee, the MPC, meets to decide on interest rates. No change expected as the bank holds rates at
5.25% for the fifth time. GBP and UK assets sensitive. Any change to the view that first rate cut in August will affect Sterling.
Friday
UK
Core Retail Sales. Expected at -0.5% following better than expected reading last month.
