The markets are quickly coming to the realization that higher for longer may become a fact with the Feds in their management of US Interest Rates. Get my take on current market price action in our Weekly Market Round-Up.
Market Sound Bites:
US Indexes retreated for the week amid heightened fears of conflict in the Middle East and some signs of persistent inflation pressures that pushed long-term Treasury yields higher. Large-caps held up better than small-caps, with the Russell 2000 Index suffering its biggest daily decline in almost two months on Wednesday and falling back into negative territory for the year to date. Stocks pulled back sharply to end the week, however, in the wake of reports that Iran was preparing to directly attack facilities on Israeli soil for the first time. Oil prices rose on the news, along with the U.S. dollar, which is typically viewed as a “safe haven” in times of international turmoil. Meanwhile, the CBOE Volatility Index (VIX), Wall Street’s so-called fear gauge, spiked to its highest level since November.
The primary factor weighing on sentiment appeared to be Wednesday morning’s release of the Labor Department’s consumer price index (CPI) data, which showed headline prices rising by 0.36% in March, right in line with February’s increase, in contrast with consensus hopes for a small decline from the month-earlier pace. Overall inflation rose 3.5% over the preceding 12 months, its biggest gain since September. In the wake of the report, futures markets began pricing in roughly a 20% chance of a rate cut at the Federal Reserve’s June policy meeting versus roughly 50% before its release. Thursday’s release of producer price inflation data seemed to help calm inflation fears and help equity markets recoup a portion of their losses. Producer prices rose 0.2% in March, a tick below expectations and well under February’s 0.6% increase.
Meanwhile, in Europe, the ECB left its key deposit rate at a record high of 4.0%, as expected, but said that if an updated inflation assessment, which is due in June, “were to increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction.” In the U.K. we see that GDP in February expanded 0.1% sequentially, thanks to a rebound in manufacturing output. And in Germany, industrial production in February rose 2.1% sequentially, the second consecutive month of strong gains, due to increased construction output.
In Japan, the yen weakened from the high-JPY 151 range against the U.S. dollar level to beyond the 152 level that many investors have come to regard as the point at which Japanese authorities could be expected to intervene in the foreign exchange markets to prop up the currency. The BoJ recently ended its negative interest rate policy and unwound its program of yield curve control however, it is worth noting that Japan’s monetary policy remains among the most accommodative in the world, and expectations are that financial conditions will also remain accommodative for the time being. Therefore, a combination of historic weakness in the yen and accommodative monetary policy provide a favorable backdrop for Japan’s stock indexes, where many of the largest constituents are exporters deriving a sizable share of their earnings from overseas.
In China, exports and imports fell in March and reversed gains from the first two months of the year. Exports shrank a worse-than-expected 7.5% in March from a year ago compared with a 7.1% rise in the January to February period. Meanwhile, imports dipped 1.9%, down from 3.5% growth in the first two months of the year. The latest results dealt a setback to China’s reliance on external demand to bolster its economy and added pressure on Beijing to ramp up stimulus measures as it tries to achieve its 5% annual growth target set at the National People’s Congress in March.
Enjoy this week’s Market Round-Up
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