The first thing to mention today
Inflation’s not fading away
Instead, CPI
Was one again high
Though risk assets still made some hay

This raises the question again
Of if the Fed will, not of when,
Begin cutting rates
And foster debates
If Powell’s in charge…or Yel-len

Well, the CPI data was hotter than forecast with both headline and core printing at 0.4% and the Y/Y numbers both coming a tick higher than forecast at 3.2% and 3.8% respectively.  While serious analysts are revisiting their thoughts on whether the Fed is anywhere near a position to consider cutting rates, as I predicted yesterday, the Fed Whisperer, Nick Timiraos of the WSJ, was out before noon (at 11:25am to be precise) with his article explaining that the hot CPI print didn’t matter, and the Fed would still be cutting rates come June.

And maybe that is all we need to know.  As the working assumption is he is speaking directly to Chairman Powell, and that was the message he was instructed to convey, then maybe they will be cutting rates then.  But to take the doves’ favorite metric from December, the 3-month running average on an annualized basis, it is now running at 4.3%.  That feels a touch high for the Fed to consider cutting, but in fairness, we are still three months away from that June meeting so many things could change in the interim.

As it happens, the equity markets didn’t wait for the WSJ article to decide that rate cuts are still coming on schedule, as the futures rallied instantly, and stocks were higher all day.  At this point, it is very difficult to see what will derail the current rally as clearly there is no fear of the current rate structure remaining in place.  While trees don’t grow to the sky, apparently, they can get pretty tall!  It is a fool’s errand to try to determine the top ahead of time, and I believe the market, and the economy as a whole, needs to find a non-speculative clearing price (i.e. retreat sharply), but it doesn’t seem like that is a near-term scenario.  In other words, I guess it’s ‘party on!’

The first hints of Spring
Have seen wages in full bloom
Is ZIRP on its way?

Turning to Japan and the Spring wage negotiations there, headlines out of Tokyo this morning show that wages are going to be substantially higher in 2024 than they were in 2023.  Key results that have been announced include Nippon Steel, Nissan, Panasonic, and Toyota, which said its wages would be rising the most in 25 years.  These wage hikes are seen as a precondition for the BOJ to exit NIRP, although it is not clear if it is a sufficient condition.  While the politicians are crowing as higher wages are obviously welcome to the people there, the market is hardly behaving as though these numbers are going to do the job.  For instance, the yen (-0.2%) is a touch softer this morning, 10-year JGB yields didn’t budge while 2-year JGB’s saw yields tick down a bit, and Japanese stocks barely edged lower, down about -0.3%.  My point is the market behavior is not necessarily consistent with the view that Japanese rates are about to move.   The totality of the wage negotiations will be published on Friday, so perhaps that will offer more clarity.

However, at least with respect to USDJPY, given what we just learned about US inflation and the prospects for US rate cuts (which are diminishing in my view), that 10bp rate hike by the BOJ does not feel like it will be sufficient to cause a major adjustment.  We will need to hear Ueda-san explain that any move is the beginning of a new cycle, and rates are heading higher, full stop.  And I don’t see that happening.

And those are really the key stories for the morning, risk is still on, and Japan appears to be edging closer to exiting their negative rate policy.  So, let’s see how markets have behaved overall.

Despite the US rally, there were many more laggards than gainers in the Asia session with China, Hong Kong and India all seeing equity markets under pressure.  As well, the gainers showed only very modest gains (Australia +0.2%, South Korea +0.3%) so generally it was a negative session.  However, in Europe this morning, the screens are green with a mix of very marginal gains (UK, Germany) and strong performances (CAC +0.5%, IBEX +1.5%) with the Spanish and Italian markets making new multi-year highs.  As to US futures, at this hour (7:45) they are very slightly firmer, 0.15%.

The bond market did respond as one would expect on the back of the CPI data, with Treasury yields rising 6bps yesterday.  As well, there was a 10-year Auction which was a bit sloppy with a 0.9bp tail and settlement price of 4.166%.  European yields rose in the wake of Treasuries yesterday but are essentially unchanged this morning, as are Treasury yields.  As long as the inflation story remains on the hot side, it is difficult to see yields declining from these levels.

In the commodity markets, the one thing that really reacted to the CPI data was gold, which fell 1.1% yesterday, although given the recent remarkable run higher, it can be no surprise there was some profit-taking.  And this morning, it has bounced 0.25% so far.  As to oil (+1.6%) it is rallying this morning but that is simply offsetting yesterday’s declines and it remains in the middle of that $75-$80 range.  A quick word about copper (+2.0%) which has traded above $4.00/Lb for the first time in almost a year and looks to be making a strong move higher.  Whether that is on growing economic optimism in China or elsewhere is not clear, but that is the price action.

Finally, the dollar is surprisingly little changed overall.  In the immediate wake of the CPI print yesterday, it did rally nicely, but it has since ceded those gains and is largely unchanged from then.  In fact, net from yesterday’s closing levels, it is softer by about 0.2% against almost all its major counterpart currencies.  I am quite surprised at this price action as I would have expected the dollar to benefit, but not much as of yet.

The only data released today is the EIA oil and product inventories for the week, something which will impact the oil market but not much else.  When looking at the totality of the data, there is no indication to me that inflation is going to be declining soon.  It is very hard for me to look at what is happening and conclude that the Fed is compelled to cut interest rates to prevent a problem.  Until we see a more substantial decline in economic activity, I have to believe that they will stand pat, regardless of the politics.  If they don’t, I would expect the dollar will fall sharply as inflation reignites in the US.  And that doesn’t seem like the conditions they want if they truly want to prevent a change in the White House come November.

For today, and likely through the FOMC meeting in one week’s time, I suspect risk assets will perform well.  But it also feels like more risks are building that can have a negative result.

Good luck
Adf