The direction was mixed yesterday, as Tuesday’s hotter-than-expected US CPI print gave cold feet to investors regarding the Federal Reserve’s (Fed) ability to cut interest rates as soon as in June. The S&P 500 and Nasdaq consolidated near record, and energy stocks helped temper losses in the S&P 500 as technology stocks traded down. The Dollar Index rebounded as the selloff in Treasuries accelerated despite a strong 30-year bond auction.
Today, the focus is on the US retail sales and producer price inflation data. Retail sales are expected to have rebounded following a relatively weak read in January, while producer prices are expected to have risen in February, fueled by higher energy prices. Normally, I would expect higher-than-expected retail sales and higher-than-expected PPI data to temper the Fed rate cut bets, back a further rise in US yields and the dollar, and trigger a downside correction in the US stock markets.
Speaking of oil prices, the positive pressure is building after the EIA data confirmed a 1.5 mio barrel fall in US oil inventories last week, and after Ukraine attacked major Russian oil refineries with drones and damaged around 12% of the country’s oil-processing capacity. The barrel of US crude tested the $80pb level. Offers near $80pb could be cleared on the back of rising tensions, yet I doubt that we will see a sustainable rise in oil prices above this level when the geopolitical jitters disappear from the headlines. There is still strong resistance within the $80/82pb range.
Elsewhere, tensions between the US and China are on the rise again, as the US House passed a bill to ban TikTok unless the Chinese ByteDance sells the platform to a third party that would comply with the US data security demands. The bill is on its way to the White House. The US accuses China of using user data and building propaganda using the platform. The affair is highly political of course, and it is one more major point that opposes the two presidential candidates, Biden and Trump. Biden says he will sign the bill, while Trump says banning TikTok would give too much power to Facebook (NASDAQ:META), which he openly dislikes – as the platform imposed a ban on the ex-president after the Capitol riot back in 2021. Meta didn’t react much to the news.
Meanwhile
European stocks extended gains and hit fresh records as energy and luxury names led the rally higher yesterday. The EUR/USD consolidates gains below the 1.10 level and should see solid resistance into this level, especially if we see another hot inflation report from the US today. European Central Bank’s (ECB) Wunsch said yesterday that the bank may eventually start lowering the interest rates without being sure that inflation is returning to the 2% target, and that the latter decision could come ‘before so long’. Listening to Lagarde and other ECB members, it sounds like a June cut is a done deal unless a significant surprise occurs on the inflation front. But a lot can change from now to June. If tensions between Ukraine and Russia escalate in a way to boost oil prices, we will certainly see the central banks constrained to delay their rate cut plans. For now, however, the expectation is that the ECB will start cutting in June and cut 4 times this year. The bank also announced changes to its operational framework in a way to allow the banks in different locations to ask for the liquidity that they need so that the monetary policy could be more flexible to better meet the various needs of various economies across the bloc as excess liquidity dries out. The market reaction to the latter changes is expected to be limited.