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  • richard evans

Higher US inflation puts a June rate cut out of reach

Good morning

 

The US inflation release yesterday really sent the markets running for cover with both the headline and the core reading coming in above expectations.  The US dollar shot higher and has held most of those gains.  GBPUSD traded down from 1.2705 to a low of 1.2520 while EURUSD moved from 1.0865 to 1.0730.  USDJPY flew higher after the announcement, breaking the 152.00 area with ease and pushing on to 153.15 where we trade as I type, Japan officials have been trying once again to talk JPY up but they know ultimately that fighting against a strong US dollar is a very tough battle to win. 

 

The higher reading throws yet more doubt on the chances of a June rate cut, particularly when we remember that higher oil prices must surely impact next month’s inflation number.  Markets have shifted to price in just two rate cuts this year and we may have to wait until November for the first cut according to some.  The release of the FOMC minutes yesterday evening, which showed almost all Fed members thought rate cuts would be appropriate this year, did nothing to stop the higher USD. 

 

Perhaps it was Biden’s comment on the inflation report that helped USD make the gains it did.  He said a rate cut may be delayed for a month due to the CPI reading.  It is quite unusual for a President to be so specific when it comes to monetary policy.  He did add that rate cuts would still come, although I have seen more than one forecaster talk of potential for rate rises before we see rate cuts.

 

The large trade I mentioned yesterday on US interest rate futures is now $50m out of the money, or of course in the money, depending on which side of the trade you’re on. One trade that did turn profitable however was my NZDUSD put option which in the morning had looked unlikely to offer anything other than lost premium, at expiry NZDUSD was below 0.6000 netting a small profit, before moving lower towards 0.5965. 

 

The US CPI release took some attention away from BoC’s rate meeting where they left rates unchanged.  USDCAD had pushed up after the US data from 1.3560 and continued to push higher post-BoC, reaching a high of 1.3700 by the London close.  BoC were mildly dovish with an acknowledgement that inflation was slowing, again I have to mention higher oil prices possibly ruining that line of thinking next month.   Still, UBS are looking for 1% of rate cuts through 2024 starting with a 25bps cut in June,

 

Today we have the ECB rate meeting.  No change in rates is expected, what will be of more interest is the press conference where we look for clues as to the timing of a rate cut, should it come.  I still think that out of Fed, BoE and ECB, it is the ECB  that has the greatest chance of a June cut.  BoE should come next and Fed currently last in line. 

 

We will also have the latest US PPI numbers this afternoon, another inflation release that is overshadowed by CPI but still a potential market mover, and higher than expected reading could offer further support to the US dollar.  Several Fed officials will be speaking, let’s see if they mention anything about inflation and/or rate cut chances.

 

Early tomorrow morning we will have UK GDP for February.  Market is looking for just 0.1%, hardly anything to get excited about but would be better than the negative readings we saw late last year. 

 

In sport, more Champions league action last night saw Barcelona and Atletico Madrid take a one goal lead into the second leg over PSG and Borussia Dortmund respectively.  Today sees more European action with West Ham, Liverpool and Aston Villa all involved in quarter finals. 

We also have the start of the US Masters golf, well we should have, although with thunderstorms forecast to hit Augusta there is a chance play will be disrupted.  I have only very rarely bet on golf, the odds of picking a winner out of the 89 or so players just don’t seem long enough to make it worthwhile.  For the record, Scheffler is favourite at 5-1, McIlroy is next at 12-1.  McIlroy is around evens for a top ten finish, hardly an exciting bet but possibly better value.

 

Have a great day.  Forecast here looks like it could be dry and warm for a couple of days, make the most of it if you can.  Its not getting dark until 8pm or so which means I could even nip over the road for a quick 18 holes after work…   

 

-  13.15 ECB rate announcement

-  13.30 US PPI, initial jobless claims

-  13.45 ECB press conference

-  13.45 Feds Williams speaks

-  17.30 BoEs Greene speaks

-  18.10 Feds Bostic speaks

-  23.30 NZ business PMI

-  04.00 China trade balance

-  07.00 UK GDP

-  07.00 German HICP

 

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