US Session Recap

US Session Recap: US CPI lower but Fed officials remain cautious

CPI, Fed, Gold, Silver, WTI, Bitcoin, Dow, S&P, Nasdaq, Russell 2000, CHF, USD, CAD, BOC, BOE, ECB, BOA, EIA AUD, GBP

The headline CPI in the US dipped to 5% from 6% the previous month, but core inflation increased to 5.6% from 5.5% the previous month. The shelter component decreased from the previous month but remained at 0.6% (vs. 0.8% the previous month). Shelter contributes 34.7% of CPI inflation. Many economists/analysts had predicted a drop, but while 0.6% MoM is lower than 0.8% last month, it is still a large number and, at roughly 35% of the CPI, a key contributor to the rate remaining well above the 2% target level.

Despite the sharp drop, the Fed's Barkin stated that he is still waiting for inflation to fall...which is correct. The headline and core inflation rates remain unchanged at 5% and 5.6%, respectively. Barkin stated that in order to kill inflation, inflation must hit the 2% target for a few months. The Fed's Daly was likewise unimpressed by increased inflation, stating that the Fed still has work to do on rate hikes.

Meanwhile, according to the Fed minutes, Fed staff predicted a slight recession by the end of the year. They also predicted that inflation would "step down markedly" this year and "sharply" the next year. At the same time, they stated that while economic risks are to the downside, inflation risks remain to the upside.

The room is spinning from all of the projections and comments, but Fed officials appear to be sticking to their guns on rates (with rates remaining high until 2024). They will continue to battle inflation - or pretend they will fight it - despite signs that it is decreasing despite increasing shelter costs.

As rates fell today, the market took a different track.

• 2 year at 3.968%, -9.0 basis points.
• 5 year yield 3.467, -8.2 basis points.
• 10 year yield 3.401%, -3.2 basis points. (this despite an unimpressive 10 year note auction with a 2.0 basis point tail)

The longer 30 year yield did move marginally higher.

• 30 year yield 3.633% +1.2 basis points.

The terminal rate is expected to be 5.01% in June, with the Fed's target rate declining to 4.36% by January 2024.

In other markets.

• Spot gold is trading up $11.06 or 0.59% at $2014.68.
• Spot silver is up $0.42 or 1.71% at $25.49.
• WTI crude oil is trading at the highest levels this year at $83.27.
• Bitcoin is dipping back below the 30,000 level as we head toward the end of the day at $29,914.

US stocks with the NASDAQ index doing the worst:

• Dow industrial average fell -38.29 points are -0.11% at 33646.51.
• S&P index fell -16.99 points or -0.41% at 4091.96.
• NASDAQ index fell minus 102.55.2 -0.85% at 11929.33.
• Russell 2000 fell -12.89 points or -0.72% at 1773.69.

The CHF is the strongest of the major currencies in the forex market, while the USD is the weakest. The CAD fell today as the Bank of Canada held rates constant for the second day in a row.

BOE's Bailey: We are not seeing any concerning signs in markets due to QT

• I do not see the makings of a 2007-08 crisis.
• we are not seeing concerning signs.
• We watch QT very carefully, we do not want it to have a detrimental impact on markets.

Today Bailey has been on a QT kick. These remarks have no bearing on GBP.

WTI crude oil futures settle at $83.26

WTI crude oil is currently trading at $83.26 per barrel. This is an increase of $1.73, or 2.12%. The closing is the highest since February 16th, 2022. Going back to January 18, the price moved over the 2023 high of $82.66 and the December 1, 2022 high of $83.34. My price today was $83.53. The lowest price was $81.28.

The next significant goal is the sliding 200-day moving average. That moving average level is currently $83.81. With today's high price of $83.53, the price came within $0.28 of the critical moving average goal level. Since August 30, 2022, the crude oil price has not moved above its 200-day moving average. Going forward, this is a Key level for both buyers and sellers. A move over this level would be more positive. Find sells against the level, and move below $82.66 for more downside testing.

ECB's Villeroy: Still have a little way to go with rate hikes

• Deferred effect of our past rate hikes will be more significant that the one of our future decisions.
• Too early to discuss the size of May move.

The market is pricing in a 29% chance of 50 bps in May and a 71% chance of just 25 bps.

Bank of America credit card data is a warning about the consumer

Bank of America has released its most recent credit card spending data, which contains some worrisome information. In March, card spending per home declined 1.5% month on month.

They point out that spending in gasoline, furniture, home renovation and department stores was particularly low. As a result, they expect a 0.5% drop in the retail sales control group in Friday's report. In comparison, the consensus estimate is -0.3%.

Is this a precursor to a consumer slowdown? Perhaps not.

"In our view, the slowdown In Federal tax refunds In March, as reported by the Internal Revenue Service (IRS), contributed to the weakness in spending," BAC writes. "The IRS Issued $84bn of refunds this March, which is $25bn less than the refunds issued in March 2022."

Furthermore, supplementary food stamp benefits ran out in March. According to Bank of America, a recession will begin in the third quarter of this year.

Summary:

• Slowdown in federal tax refunds in March led to weak spending.
• IRS issued $25bn less in refunds compared to March 2022.
• Average refund size 10% smaller, unlikely to catch up to 2022 levels.
• Expiring SNAP benefits may have affected spending.
• No clear evidence of regional bank stress impacting spending.
• 1Q 2023 retail ex-auto spending growth: 5.2% quarter-over-quarter annualized Weak hand-off for 2Q growth, raising risk of contraction.
• Base case: recession starting in 3Q 2023.

See the note here

Fed minutes: Participants noted they considered keeping rates unchanged

• Actions taken to calm conditions lowered near-term risks, allowing them to judge a hike as appropriate.
• Several participants noted they considered whether it would be appropriate to leave rates unchanged.
• Several participants noted wage growth was still well-above rates consistent with 2% inflatio ntarget.
• Participants assessed that labor demand is substantially exceeding supply.
• Generally saw inflation risks tilted higher.
• Tightening credit was likely to weigh on demand, which could help inflation.
• Little evidence pointing to disinflation for core services excluding housing.
• Fed staff forecast a mild recession.

I don't see anything here that hints to what's to come in May. The market is pricing in a 71% chance of a 25 basis point increase, but that would be the last.

More from Feds Daly: There is a sense we will get rates up to a level and stay

• Bank stresses have stabilized.
• Fed has tools for monetary policy, financial stability and they don't compete with each other.
• Expects inflation to end 2023 a little above 3%.
• Inflation expectations are anchored, allowing us to take a couple of years to bring down inflation.
• Policy tightening is at a point now where we don't expect to continue to raise rates every meeting.
• There is a sense we will get rates up to a level and stay.
• Does not want to forecast the end of a tightening cycle.
• Inflation report today was good news.
• Will look in CPI inflation to see if core services ex housing are coming down.

The shelter costs within the inflation report today showed a gain of 0.6%.

• Services ex shelter came in unchanged at 0.0%.
• Core services ex shelter were still up +0.4% vs +0.43% prior.

The core services ex shelter remained up 0.4% vs 0.43% the previous year, but the services ex shelter remained steady. The Fed is taking the position that inflation must be attacked from all sides. It is not only goods, but also services. Then it's not simply services, but core services, such as shelter. This indicator was nearly constant month on month at 0.4%.

I also have the feeling that the Fed does not want stock prices to rise.

More headlines:

• There's a lot of uncertainty about how long it takes for rate hike's to impact the economy.
• There's a lot more in the pipeline of monetary policy tightening.
• When credit conditions tighten, it puts brakes on the economy so fed doesn't have to tighten more. Bank lending will contract.
• Most likely there will be no recession.
• We do need to slow the economy to get back into balance.
• Does not see a pattern forming yet where bank lending is contracting.

Feds Daly: Fed has more work to do on rate hikes

Mary Daly, the president of San Francisco, is speaking and says:

• Strength of the US economy, elevated inflation suggests more work to do on rate hikes.
• Prudent Fed policy requires calibrating decisions based on all the data.
• She sees a good reason that economy may keep slowing even without further rate hike's.
• we are committed to ensuring all deposits are safe. Becky system is sound and resilient.
• US economy remains strong, labor market extremely tight.
• Fed must monitor tightening credit conditions in determining path of rates.
• Remains resolute, committed to 2% inflation goal.
• Global headwinds, lagging impact of fed funds rate hike's are also factors in setting policy.

Earlier today, Fed's Barkin hinted that "we are not there yet." He stated that he would require several months of inflation at the 2% target level before declaring victory.

Goldman Sachs sees Fed terminal rate at 5.0% – 5.25% now

Goldman Sachs has reduced its terminal fed target range from 5.25% to 5.5% to 5.0% -5.25%. They see a May 25 basis point increase but not a June hike of the same magnitude.

They cite the expectation that housing costs will begin to fall, reducing the need for the Fed to continue hiking.

With the headline CPI now at 5.0%, it remains well above the 2% target. However, the next three months will see monthly gains of 0.3%, 1.0%, and 1.3%. In terms of the YoY equation, this amounts to 2.6%. Who knows how low inflation will go if housing costs, which account for 34.7% of the total CPI, flatten and goods inflation continues to behave due to slower growth expectations. If MoM numbers remain unchanged, 2% will be in traders' sights. This month's service ex shelter rate was 0.0%. This month, core services excluding shelter increased by 0.4%:

Macklem opening statement: Governing Council discussed whether it had raised rates enough

• Canadian economy remains in excess demand.
• Bank is encouraged that inflation is declining.
• Considered whether rates may need to stay restrictive for longer.
• BOC remains more concerned about upside risks to forecast.
• We've come a long way from the 8% inflation last summer.

These statements have a hawkish slant, which is unsurprising. I don't see him talking about hiking much more here. The USD/CAD pair is unchanged on the day at 1.3462, but the loonie is weaker against the rest of the world as the US dollar falls broadly. Despite a rise in oil prices, this shows that many in the market expected the BOC to be more hawkish.

Fed's Barkin: I definitely see demand cooling

• Says he's watching credit conditions.
• we are certainly past peak inflation, still a ways to go.
• my view is we react to inflation as it comes in, in terms of rate path.
• looking very hard at the man, labor market inflation.
• credit card data giving me some comfort to me and is calling.
• if you want to get inflation back to goal, you need multiple months where it's headed their.
• not hearing there is much change in bank lending at the moment.
• not seeing evidence of inflation cracking yet.

Barkin is not a voting member this year

ECB Holzman: Inflation outlook argues for another 50 basis point hike in May

ECBs Holzman is on the wires with some hawkish comments:

• inflation outlook argues for another 50 basis point hike in May.
• ECB needs to keep raising rates noticeably beyond May.
• ECB may be able to accelerate QT from July.

At 1.0982, the EURUSD is trading around its highs. Soon after the US CPI data, the high price reached 1.09892. The lowest price after the CPI was 1.09578. This remained above the swing zone of 1.0925-1.09438 (high yellow area on the chart below). It would take a move below that level to disappoint buyers in the future.

Bank of Canada holds rates at 4.50%, as expected

• Overnight rate vs 4.50% prior.
• Governing Council continues to assess whether monetary policy is sufficiently restrictive to relieve price pressures and remains prepared to raise the policy rate further if needed to return inflation to the 2% target.
• 2023 GDP forecast 1.4% vs 1.0% prior.
• 2024 GDP forecast 1.3% vs 1.8% prior.
• Sees 2.5% GDP growth in 2025.
• "Economic growth in the first quarter looks to be stronger than was projected in January, with a bounce in exports and solid consumption growth".
• Monetary Policy Report projects global growth of 2.6% this year, 2.1% in 2024, and 2.8% in 2025.
• Previously forecast inflation would fall to around 3% in the middle of 2023 and back to target in 2024.
• Inflation in many countries is easing.
• Labour markets remain tight and measures of core inflation in many advanced economies suggest persistent price pressures, especially for services.
• Global economic growth has been stronger than anticipated.
• US growth is expected to slow considerably in the coming months.
• Full text of the MPR

The market was putting in a 95% chance of no change at today's meeting, and all economists polled by Reuters predicted no change.

At 11 a.m. ET, Bank of Canada governor Macklem and senior deputy Rogers will hold a press conference.

This is how the Bank of Canada sees the economy evolving:

"As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year. Softening foreign demand is expected to restrain exports and business investment. Overall, GDP growth is projected to be weak through the remainder of this year before strengthening gradually next year. This implies the economy will move into excess supply in the second half of this year."

That certainly sounds like a central bank sitting on the sidelines. The next question is when the cuts will occur.

The USD/CAD is lower following the decision, although this is due to improved (if choppy) broader sentiment following the US CPI report. Oil may be helping the Canadian dollar as it approaches the $83 barrier level.

US March CPI 5.0% y/y vs 5.2% expected

• Prior was +6.0%.
• m/m CPI +0.1% vs +0.2% expected.
• Prior m/m reading was +0.4%.
• Real weekly earnings -0.1 % vs -0.4% prior.

Core inflation:

• Ex food and energy +5.6% vs +5.6% y/y expected.
• Prior ex food and energy +5.5%.
• Core m/m +0.4% vs +0.4% exp (unrounded +0.385%).
• Prior core m/m +0.5%.
• Shelter rose +0.6% vs +0.8% prior.
• Services ex shelter 0.0%.
• Core services ex shelter +0.4% vs +0.43% prior.

More details m/m:

• Food 0.0%.
• Energy -3.5%.
• Shelter: +0.6%.
• New vehicles +0.4%.
• Apparel +0.3%.
• Medical care services -0.5%.

Prior to the release, the market was pricing in a 75% chance of a 25 basis point hike on May 3, but that has since dropped to 67%. Market participants who believe they are nearing the end of the hiking cycle will feel more at ease now. There is plenty of good news here, with headline inflation undershooting and key components of core inflation also falling.

The US dollar is falling across the board as the Fed appears to be gaining control of inflation. I think that a significant portion of this is due to the reversal in energy prices, but it certainly buys the FOMC some time for higher rates to bite into core inflation and the lagged shelter numbers to work their way through.

The dollar is down around 60 pips across the board as a result of this, and US 2-year yields are down 15 basis points as a result of a front-end-led rally in fixed income. Futures on the S&P 500 are up 39 points.

ECB's De Guindos: Recent core inflation data in the Eurozone is sticky

• Provisional data points to positive growth in Q1 in the Eurozone.
• Rate decisions to be data dependent.
• Recent market tensions will have impact on macro projections.
• We are not as optimistic on core inflation as on headline inflation in Eurozone.

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