Risk appetite and sentiment were boosted this week, as markets celebrated the latest US CPI reading.
- US CPI moderates
- Bond yields decline amid rate cut speculation
- Oil gains on lower inventory levels
- Rand capitalises on a weaker dollar
US INFLATION COOLS
April 2024 brought a slight, yet significant cooling in United States (US) inflation. The Core Consumer Price Index (CPI) saw a modest increase of 0.3% from March, marking the first deceleration in six months. Year-on-year, the core CPI advanced by 3.6%, providing some relief for Federal Reserve officials eager for an interest rate cut later this year.
The overall CPI also rose by 0.3% month-on-month and 3.4% year-on-year, with shelter and gasoline contributing significantly to the increase. While these figures indicate that inflation pressures are easing, Federal Reserve (Fed) Chair, Jerome Powell, emphasised the need for patience, suggesting that more consistent readings are necessary before any policy changes are considered.
The data revealed a mixed inflation landscape. While the pricing of services, especially rent and owners’ equivalent rent, showed signs of deceleration, core goods prices continued to rise, albeit modestly. Used cars and trucks provided some relief in the core goods sector, but inflationary pressures remained in other areas.
The April data supports the narrative that the Fed might gain confidence in inflation’s downward trajectory sooner rather than later. However, Powell and other policymakers stress the importance of multiple data points before making any decisions. Some officials remain sceptical about rate cuts this year, advocating for a cautious approach to ensure sustained disinflation.
In addition to the CPI, other economic indicators reinforced the cautious optimism. The Producer Price Index (PPI) showed a more subdued increase in key categories that influence the Personal Consumption Expenditures (PCE) Price Index, suggesting a potential easing in broader inflation metrics. This alignment with PCE trends points to a stable, albeit cautious, economic environment. US retail sales data from April showed stagnation, indicating that high borrowing costs and rising debt levels are curbing consumer spending. This aligns with the Fed’s strategy of dampening demand to control price pressures. Meanwhile, the recent release of non-farm payrolls data pointed towards a cooling in the labour market.
The positive market response to April’s inflation data was evident across various sectors. The Dow Jones, NASDAQ Composite, and S&P 500 indices all closed higher, with the S&P 500 reaching a record high. Concurrently, US government bond yields decreased, and the dollar weakened to multi-month lows. The CBOE Volatility Index (Vix), a measure of market volatility, dropped significantly, indicating reduced investor anxiety. This decline in volatility, alongside rising stock indices and falling bond yields, signals a market that is optimistic about the Fed’s potential easing of monetary policy. Traders now estimate a 69% chance of a rate reduction by September, up from previous estimates.
April’s inflation data provides a glimmer of hope for markets and policymakers alike. While the Fed remains cautious, the cooling inflation offers a tentative step towards potential interest rate cuts. However, the mixed signals from various inflation components remind us of the complexities inherent in managing the US economy’s price stability.
MARKET OVERVIEW
Bond yields dip amid rate cut speculation
In May, the yield on the US 10-year Treasury note was down 1.77% for the week, after dipping to its lowest level in over a month. This decline was driven by increasing market expectations for the Fed to deliver 50 basis points in rate cuts this year. Weak economic indicators such as higher-than-expected initial jobless claims, a slight drop in building permits, and disappointing local activity gauges for May reinforced concerns about a softening labour market and economic slowdown. As a result, around 70% of the market is now positioned for the Fed to begin its loosening cycle in September, with nearly 65% expecting two or more cuts this year.
In the United Kingdom (UK), the 10-year government bond yield dropped below 4.1%, influenced by the fall in US yields and softer domestic inflation and retail-trade data. The Bank of England (BoE) has hinted at a potential rate cut in the summer, with a 50% chance of a cut in June and two quarter-point cuts expected by year-end. The UK job market showed signs of cooling, with the jobless rate hitting an eight-month high of 4.3% in April, and wage growth remaining steady at 6%.
South Africa’s 10-year government bond yield hovered around 10.60%, its lowest level since early April. This was in line with trends in the US, where cooler inflation and retail sales data raised expectations for several interest rate cuts by the Fed. However, the South African Reserve Bank (SARB) is anticipated to maintain its current high interest rates due to persistent inflation and uncertainties surrounding the upcoming general election, which could impact economic policy.
Gold blows off some steam after reaching one-month highs
Brent crude futures rose above $83/barrel, extending gains from the previous session, supported by a larger-than-expected decline in US crude inventories. Data from the Energy Information Agency indicated a 2.508 million barrel drop in US crude stockpiles last week, surpassing the forecast of a 1.362-million-barrel draw. This, coupled with decreases in gasoline and distillate fuel inventories, boosted oil prices. Additionally, softer US inflation data bolstered expectations for a Fed rate cut in September, enhancing the demand outlook for oil. Meanwhile, the International Energy Agency revised down its global demand growth forecast by 140,000 barrels per day to 1.1 million.
Gold prices fell below $2,380/ounce after nearing one-month highs as traders evaluated mixed US economic data. While US housing starts disappointed, initial jobless claims fell less than expected, and import and export prices accelerated. In addition, comments from Fed officials, indicating the need for more evidence before easing monetary policy, tempered earlier optimism spurred by cooling inflation and stalling retail sales.
Equities digest mixed data and earning reports
US stocks fluctuated on Thursday following strong gains the previous day, which saw major indices reach record levels. Investors digested mixed economic data, including lower-than-expected initial jobless claims, higher import and export prices, disappointing housing starts, and stalled industrial production. Corporate earnings also influenced market movements, with equipment manufacturer, Deere & Company, shares dropping over 2% after cutting its full-year earnings outlook, while retailer, Walmart, rose 6.6% on better-than-expected results. Meme stocks (those that have generated their own slang and language used in online forums and media) like GameStop and AMC Entertainment saw significant declines.
In Europe, the DAX remained stable near record highs, with mixed corporate earnings affecting performance. Siemens, an industrial technology company, fell 2.3% due to weaker-than-expected profits, while Deutsche Telekom, a telecoms firm, saw its shares drop slightly despite positive earnings. Conversely, financial services providers, Allianz and Munich RE, saw gains. In the UK, the FTSE 100 declined after two days of gains, impacted by corporate results from airline, EasyJet, petroleum and energy firm, BP, and retailer, Tesco. However, telecoms company, BT Group, surged 9% on positive future cash flow projections.
South Africa’s JSE All-Share Index edged higher to over one-year highs, supported by positive sentiment from softer US inflation data, which raised expectations for Fed rate cuts. Local market gains were led by multi-sector firm, Karoo, and miners, Impala Platinum and Sibanye-Stillwater, while hospitality company, Tsogo Sun, underperformed.
Rate cut bets take centre stage in currency markets
The US Dollar Index rose slightly to 104.5 on Thursday after falling in the previous session, influenced by mixed US economic data and comments from Fed officials. Initial jobless claims aligned with forecasts, but other indicators such as import and export prices, housing starts, and industrial production presented a mixed economic picture. Despite this uncertainty, expectations for Fed rate cuts later this year persist.
The euro climbed above $1.085/£, its highest level in five weeks, amid growing expectations for rate cuts by both the European Central Bank and the Fed. Recent euro area GDP data and optimistic European Commission forecasts contributed to this strength.
The British pound surged past $1.264/£, driven by a weaker dollar and expectations for a potential rate cut by the BoE. UK economic data showed a cooling job market and steady wage growth, aligning with BoE forecasts.
The South African rand traded around R18.20/$, reaching five-month highs amid a weaker dollar and anticipation of Fed rate cuts. Locally, SARB is expected to hold rates steady, with concerns about local inflation and the impact of upcoming elections influencing market sentiment.
Key Indicators:
USD/ZAR: 18.19
EUR/ZAR: 19.76
GBP/ZAR: 23.03
GOLD: $2,385.20
BRENT CRUDE: $83.77
Sources: Bloomberg, Reuters News, Refinitiv and Trading Economics.
Written by: Citadel Global Director, Bianca Botes.