The price is right
Stronger-than-expected US CPI report for March triggered lower UST yields, a rally in equities, and broad-based USD weakness. The data hurdle for a renewed leg higher in UST yields is rising. A successful 30y UST auction is also helping UST yields trend lower. If duration appetite is partly a function of inflation fears, then the price is right as these are concerns that investors are currently comfortable with as growth is driving yields higher—not inflation concerns.
Earnings time
US equities closed with gains, bouncing off lows after the headline that the J&J vaccine was being paused to distribute after six female cases of rare blood clots were discovered.
USTs rallied, shrugging off a more robust CPI print (headline 0.6% MoM and Core 0.3% MoM). The 30yr Auction became the last trigger coming through by 1.6bps at 2.32%, with the direct bid at 61%—highest since Aug 2014. Elsewhere, oil rose towards $60 p/b, gold slid, and BTC hit record highs ahead of Coinbase's listing on NDX today.
E-mini S&Ps re-opened +5bps but are struggling to find direction as earnings season looms and kicks off in the US later today.
With CPI data in the rearview mirror, investors are in the mood for the Q1 US earnings season, with banks among the first reporters. Previews have flagged a higher bar with the S&P 500 up about 10% this year, and bottom-up S&P 500 EPS estimate up a record 6%.
Conference call commentary should focus on supply chain issues, input cost pressure, margin cushion from pricing power and the potential impact on tax reform earnings.
On the back of a convincing string of economic data beats, the economic acceleration should be a powerful tailwind for stocks this quarter and ensure earnings growth. Indeed, earnings tailwinds look set to outweigh concerns around supply chain shortages and rising commodity prices. Importantly, positive earnings and sales revisions have been broad across sectors and industries. Even more so as the Fed continues to leave the policy dial on maximum dovish setting.
Oil markets
Oil rose toward $60 a barrel as investors assessed an uneven global demand outlook amid rising COVIC-19 cases in some regions, with the market bracing for an impending increase in supply.
Prices were spurred on by more robust than expected China import data amid a strong US growth outlook. Still, the rally was capped by pauses on the Johnson & Johnson vaccine, which could delay the economic recovery and limit oil demand growth.
US equities continue to welcome any high-risk event being put in the rear-view mirror, especially when rates markets look prime to consolidate lower.
Markets
The new hurdle for further positive data surprise is apparently now pretty high, and investors have seemingly given up fighting the Fed for now. As was the case with the US non-farm payrolls and ISM release, the rates markets had US CPI data priced to perfection. On either account, US equities continue to welcome any high-risk event being put in the rear-view mirror, especially when rates markets look prime to consolidate lower as the market tries to iron out of price pressure remain transitory or not.
And for now, traders are signaling that US data doesn't mean much for policy normalization until at least August or September when data will provide the keen transitory inflation snapshot as the year-on-year comparison is getting exceptionally noisy due to considerable base effects. To the extent you could discern anything concrete from the market reaction to the report, it was at least partially muddled by the almost simultaneous news that US health officials were halting vaccines with Johnson & Johnson's (NYSE:JNJ) shot.
The S&P 500 hit a record high on Tuesday, and the NASDAQ Composite index jumped as investors flocked to tech-related stocks and, by all accounts, took the well-telegraphed inflation "pick-up" in stride. All the while, markets remain seemingly unfazed by the halt in Johnson & Johnson's (J&J) COVID-19 vaccine rollout.
The US Food and Drug Administration says suspension of the J&J COVID vaccine is expected to come 'within a matter of days. While in the unlikely case a fully suspended J&J vaccine would prolong vaccination progress in the US, the Pfizer (NYSE:PFE) vaccine has extra production capacity. Pfizer and BioNTech (NASDAQ:BNTX) said they could produce up to 2.5bn doses in 2021; globally, only 1.3bn doses have been ordered so far, which means the US could order more vaccines from Pfizer.
Inflation came in hotter than expected in March, as the closely-scrutinized data out Tuesday showed. Still, it may not be a simple case of straight-line extrapolation. Those same base effects that will boost data in April, May, and June, consistent with peak seasonal US data, could contribute to slowing again in later months of the year when seasonal trends reverse.
Indeed, this is a growing view among the worlds top economists who know a lot more about inflation than traders and analysts do. And it is now finding after the echo in market sentiment.
Base effects have started to lift both headline and CPI inflation in y-o-y terms, a process that the street thinks will continue over the next couple of months. Headline CPI inflation climbed above 2.5% in March and could approach nearly 4% in May before slowing back in the second half of the year. (Extrapolated from UBS's Seth Carpenter Chief US Economist & HSBC's Ryan Wang US Economist inflation outlooks.)
Investors will need some proof in the earnings pudding to take the next leap of faith and confirm the lofty expectation with S&P 500 earnings pegged to rise 25% in this quarter from a year ago. That would be the biggest quarterly gain since 2018 when tax cuts under former President Donald Trump boosted profit growth.
Major central banks may have formal independence, but the current Fed actions reflect the social and political backdrop in which they operate, enhancing their desire to fall behind that inflation curve.
The Fed under Chair Jerome Powell's leadership has meant a remarkable dovish shift by focusing first and foremost on healing the labor market by recognizing the enormous redistributive power of a booming economy—one that generates both plentiful jobs and healthy wage growth, especially for low-income and minority groups.
I'm not suggesting the market has turned passionate, but investors agree that now is not the time to exit from exceptional measures given the enormous healing tasks ahead.
China tightening is getting harder to ignore
However, not to rock the boat, it is getting harder to ignore the tightening in China. Single-name credit concerns in China have had little to no contagion impact in recent years, so I do not want to overstate the importance of the China Huarong story—it could be another one-off, and things roll up on fine.
On the other hand, there is clearly a desire to tighten the screws on speculation and financial excess in China, and none of that is great for asset prices that are hitched to the China recovery train.
Oil markets
With bigger fish to fry and likely to defer to the DOE report tomorrow, oil traders and prices remain entirely unmoved by the small offsetting draw in crude to a larger than expected build in gasoline.
Oil prices remain buoyed by a weaker US dollar and a confluence of a sturdy US economic recovery and Chinese solid import data that points to a domestic revival. And the sentiment was further bolstered when OPEC suggested a brightening outlook and stimulus packages will boost economic activity and oil demand this year. And by all accounts, everyone to a tee expects to see a powerful spring and summer for US gasoline demand.
Crude prices continued to drift higher most of the EU and NY sessions, reacting to the buoyant macro outlook. However, momentum is still capped by new vaccine health concerns as the Adenoviral vector vaccine may have a problem and the continuing lockdown effects as traders await clear evidence of rising global demand.
On the supply side, the EIA's DPR signaled US shale production bottoming in April/May, consistent with the higher rig count and the pick-up in well completions that we are seeing could be the ultimate supply hurdle for oil prices heading into peak US summer driving season. Non only will shale be keen to add more barrels to this demand, but so will Saudi Arabia, especially with The Moscow Times reporting that Russian oil production may never recover to the 2019 level.
Forex markets
The US dollar fell to three-week lows on Tuesday after a well-telegraphed beat in the US inflation data failed to move the Fed policy normalization dial.
FX traders are deferring the Fed's call for liftoff later rather than sooner. The J&J imminent vaccine suspension might have helped that view by possibly pushing back herd immunity in the US. At a minimum, it certainly didn't enhance the US dollar appeal.
EUR/USD traded higher after the US March CPI despite the robust data. The pair traded down to 1.1880 before reversing higher and then sliced through the 1.1920/25 level that capped it in the past few days like a hot knife through butter. With 1.1950 currently being tested on a clean break, 1.2000 is the following technical resistance level to watch. Gripping price action indeed, indicating that the short-term pain trade in the EUR/USD remains to the topside.
The Malaysian ringgit should embellish the combination of lower US yields and more stable oil prices. Crude is starting to find some comfort at the upper end of this week’s range.
Gold markets
Gold continues to be bought by stronger hands triggered by the weaker US dollar and falling US bond yields after a sturdy inflation print combined to enhance gold's appeal.
In March, India announced that they imported 98 tonnes of gold, which puts the annual total at nearly 190 tonnes, roughly in line with YTD ETF liquidations of 200 tonnes. Even though gold spot prices have been stuck on either side of 1725 for approximately a month now, investors can take solace in the fact that liquidations are finding their way into India's physical market, which is a very "sticky" market.
Also, looking at China's customs data and imports through HK and direct implications via Switzerland, an additional 19 tonnes on demand were observed there through the first two months of the year. I think the trend continues throughout March and suggests gold is flowing into stronger hands.
On top of that, some Eastern European Central Banks continue to top up gold reserves.