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

Kiwi higher after RBNZ, now we wait for US inflation numbers

Good morning

I’ll start with RBNZ given yesterdays report caused a bit of a stir among readers.  Yes, I incorrectly stated that in February ANZ had been looking for rate cuts when in fact they had been looking for a rate rise or two.  They were disappointed back then, and again today, as RBNZ left rates on hold although their hawkish stance will be boosted by the central bank saying that rates will have to stay high for a sustained period to tame inflation.  They are nothe first central bank to suggest this and I am sure will not be the last.  NZD is higher, NZDUSD now 0.6070 so some way from the NZDUSD put option I mentioned yesterday with a 0.6025 strike.  A higher US inflation reading this afternoon is my only hope!

At the time of writing, GBPUSD is sitting at 1.2690, a touch higher than yesterday which in turn was a touch higher than the previous day.  EURUSD is actually unchanged at 1.0855 which has helped GBPEUR trade back up within a few pints of 1.1700.

The latest US inflation numbers will be released today.  The result should be pretty binary, ie a higher reading and a strong dollar, a lower reading and a weaker dollar.  Not much more to it than that,  The market is looking for slightly softer readings that last month.  Some excitement over press reports that an unnamed bond trader has placed a pretty huge trade that will be profitable if we see three rates cuts from the Fed this year.   Worth remembering that there are two sides to every trade so while emphasis is put on this, there will be a party that stands to make if we don’t see three rate cuts this year. 

At the moment, the odds of a June cut are pretty even, todays report could well set the tone for whether we’ll see anything in June.  Oil prices had started to push higher in March but it may be a month or so before we see the impact of higher prices on CPI.

USDJPY remains in the high 151’s, BoJs Ueda has said they will not use policy to directly resond to a weak yen, possibly clarifying his recent comments that suggested moving rates to help yen would be a possibility.  He does still say that if yen weakness were to impact inflation BoJ may look at rates, a very similar thing but not quite the same, rates won’t be used to push yen higher for the sake of it, but could if yen itself is affecting inflation.  Some press reports out of Japan suggest they may raise their inflation forecasts this month.  Elsewhere in Asia, I see Fitch have downgraded China’s outlook to negative from stable.  China aren’t happy.

We have a rate announcement from Canada today, they are expected to keep rates unchanged but as with RBNZ we’ll be looking to see any comments of potentially stickier inflation than has previously been hoped.  For the record, USDCAD currently 1.3565, GBPCAD 1.7205.

There was some exciting action in the first of the Champions League quarter finals where Arsenal drew 2-2 with Harry Kane’s Bayern Munich, while Man City won’t be too disappointed with a 3-3 draw at Real Madrid.  Some high quality football on display.  No English clubs are involved in this evenings quarter finals, but I’m hoping for equally exciting matches.   

Finally, my thoughts are with those in Cowes who experienced flooding Tuesday night after high tides brought water into the high street.  I’m hoping the damage isn’t too great although the pictures suggest many businesses will have been badly affected.  Unless I am mistaken we have seen the worst of the high tides.  The sun is shining today, not enough to dry things out but at least makes having windows and doors open slightly less of a chore.

It is my eldest’s birthday today. He’ll be 20, no longer a teenager, that’s enough to make me feel old.  He’s a pretty big lad, standing at about 6’3” in his socks.  Not bad going given he weighed just 4lb 4oz when he was born some eight weeks early.  Not quite sure how that happened.  Must take after his Mum…….

-  13.30 US CPI

-  13.45 Feds Bowman speaks

-  14.45 BoC rate announcement

-  15.30 BoC press conference

-  17.45 Feds Goolsbee, Barkin speak

-  19.00 FOMC minutes, monthly budget statement

-  02.00 AUS consumer inflation expectations

-  02.30 China CPI, PPI

Will RBNZ surprise with a cut tonight?

Good morning

All quiet in the currency markets yesterday, the main point of interest is a slightly weaker US dollar, despite last weeks rather storming nonfarm payroll number and some comments from Fed officials since then that puts further doubt on the prospects of a June rate cut.  Feds Kashkari, a known hawk, said the labour market remained tight and she pointed at higher oil prices as a cause for concern that inflation may not reach the 2% target, urging Fed to keep battling.  To balance the argument, ex-Feds Bullard still sees three rate cuts this year, while the Times has an article suggesting central banks were slow to raise rates and are likely to be equally low at cutting rates. 

GBPUSD is up at 1.2655, EURUSD 1.0855 which puts GBPEUR 1.1655.  USDJPY at 151.90, just a whisker away from 152.00 and FinMin Suzuki’s insistence that they are watching FX levels carefully and will act as required is having little visible impact.  BoJs Ueda was also speaking overnight, he said that they would likely have to think about reducing monetary support in the coming months but made it clear that it was important monetary policy remained accommodative until inflation reaches 2%. 

Gold has pushed back above $2,350, perhaps the reports that the Israel/Hamas peace talks are not going so smoothly is putting upward pressure on the precious metal.  Hamas said Israeli demands were unreasonable, I presume those demands were ‘please release all hostages’.  UBS has raised their forecasts and now sees gold at $2,400 by year end, citing geopolitical risks and official buying (as I reported yesterday). 

It is another light day in terms of economic data but things do start to get more interesting tonight, with the RBNZ rate announcement.  They are widely expected to keep rates unchanged at 5.5%, although RBNZ Gov Orr had said back in late March that normalised rates were on the horizon.  At the last RBNZ meeting in Feb there were some (ANZ) looking for a rate cut and while they did surprise by being less hawkish than generally expected, they didn’t go as far as cutting rates. 

While I think it is something of an outside possibility, there is a risk of a surprise cut here so I’m tempted to look at NZD downside.  An overnight 0.6025 NZD put costs around 20 usd pips, just in case we do see NZD weakness.  NZDUSD is currently 0.6035, just 15 pips off the highest levels seen over the last two weeks or so and remember that overnight options do take in the US inflation numbers that are released tomorrow.  Might just be worth a flutter.

Little else to report this end.  I’m pleased many across the world were able to see yesterdays eclipse so clearly.  Just as well it’s not here today, you wouldn’t see anything anyway, such is the cloud and rain.  More wind and rain expected, and temperatures to remain below 15° for another couple of days.  Fair to say I’m getting more than a little fed up of this weather now. 

Have a great day

-  09.00 ECB lending survey

-  03.00 RBNZ rate announcement