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US equity markets continue to look a little ropey in pre-market trade, with front-month E-mini S&P 500 futures down about 0.2% in the 4140s, not much above yesterday’s more than one-month lows in the 4110s. Some analysts have argued that equity investors have been prompted to cut some exposure to stocks, many of which remain at historically elevated valuations, due to rising inflation concerns and concerns that if inflation does come back hotter than anticipated, this could force the Fed into hiking rates earlier than expected. However, other market commentators have suggested that the most recent dip in equities (the S&P 500 has dropped about 2.5% from recent peaks) may tempt dip buyers to get back into the market; “despite the severity of the moves, we sensed limited panic in our client conversations with many using (the) weakness as an opportunity to buy the dip, particularly in the value orientated areas e.g. banks, energy and insurance” said JPM in a note.
With lots of focus on inflation, today’s US Consumer Price Inflation report for the month of April will thus crucial; expectations are for the report to show consumer prices rising at a rate of 3.6% YoY and 0.2% MoM. Low base effects (i.e. weakness in inflation this time last year due to the first pandemic lockdown) are expected to push the YoY rate of inflation significantly above the Fed’s 2.0% annual inflation target. Higher than expected inflation numbers could trigger further inflation fears and further downside in equities, particularly if the MoM number (an indicator of recent price momentum and not distorted by last year’s weak base) comes in hot. Lower than expected inflation numbers would ease inflation fears and likely the market would rally, though, as one analyst noted, with Producer Price Inflation already coming in very high for the month of April, a comparatively weak CPI reading is potentially not what stock investors want to see as it indicated companies are having a tough time passing rising input costs onto consumers, which is of course bad for profitability.
Despite the recent pullback in stocks, which would typically be a positive for the safe-havens, USD and US government bonds have failed to see any substantial rally; the former is being held in check by recent insistence from a variety of Fed members that they will be looking through any spike in inflation, given they think it will be transitory, and will instead focus on reducing economic slack (i.e. reducing the unemployment rate) by keeping policy ultra-accommodative. Rising inflation expectations, meanwhile, are driving the most recent rise in bond yields.
A Fed determined to keep interest rates low (thus keeping the incentive to use USD as a funding currency alive) whilst ignoring rising inflation (which itself erodes the value of the dollar) is being taken as a dollar negative story and preventing the dollar from being able to find much safe-haven traction amid softer global equity prices. As inflation expectations rise, meanwhile, this is likely to put further upwards pressure on nominal US government bond yields. The only reason a substantial rally in real yields will occur is if expectations begin to rise for Fed tightening (this would also be USD positive). At present, the DXY is still holding onto a 90 handle and a modest safe haven bid has brought it back from the brink to the 90.20s. US 10-year yields, meanwhile, are consolidating just above 1.60%. Subdued price action ahead of US CPI data 1330BST is likely to continue.
Turning to commodities; crude oil prices are higher, with WTI seemingly having found decent support at the $64.00 handle this week and last and looking to move back towards recent highs above $66.50. As of right now, WTI trades almost bang on $66.00, up about 75 cents or more than 1.0% on the session. The International Energy Agency (IEA) released its latest monthly oil market report on this morning and cut its forecast for oil demand growth in 2021, citing demand concerns amid India’s Covid-19 outbreak. This comes after the US Energy Information Agency (EIA) did the same in its latest monthly report, which was released on Tuesday. However, the International Energy Agency (IEA) said in its monthly report this morning that “the anticipated supply growth through the rest of this year comes nowhere close to matching our forecast for significantly stronger demand beyond the second quarter”. In other words, demand is set to outstrip supply, which is bullish, and this comment is likely supporting oil. Elsewhere, the Colonial Pipeline (the major US pipeline that was disrupted by a cyber attack over the weekend) hopes to restart a large portion of its network by the end of the week, but this news does not seem to be affecting crude oil too much. Ahead, oil traders (just like everyone else) will be keenly watching US CPI numbers at 1330BST, ahead of official weekly US EIA crude oil inventory data to confirm or deny yesterday evening’s larger weekly private API crude oil inventory data, which suggests a larger than expected draw of 2.5M barrels of crude. Precious metals are consolidating with gold in the $1830s, with market participants eager to gauge how USD and yields react to upcoming inflation data.
In terms of the non-USD G10 currencies; the antipodes (AUD and NZD) are the worst two performing G10 currencies, both down about half a percent versus the buck on the day as the two risk-sensitive currencies suffer amid a modest haven bid into the US dollar. AUDUSD has slipped back towards 0.7800, perhaps also weighed by recent negative commentary from S&P regarding the Australian government’s latest budget. NZDUSD, meanwhile, is under 0.7250. Both could also be weighed somewhat by softer than expected Chinese lending and money supply data for the month of April which, as a lead indicator for Chinese growth, suggests a slowing of economic momentum ahead. USDCNH is about 0.2% higher around 6.4400.
EUR is the next worst performer, seemingly feeling some weight amid a combination of the stronger dollar as well as broadly softer than anticipated Eurozone data out this morning. For reference, March industrial production was a disappointment, growing at just 0.1% MoM (versus expectations for a 0.7% MoM growth rate), while final consumer price inflation numbers for the month of April out of France saw a slight revision lower versus the preliminary estimate. But it is not all bad news; the EU Commission upgraded its Eurozone growth and inflation forecasts for the years of 2021 and 2022. EURUSD is subdued around weekly lows in the 1.2120s.
JPY, GBP, CAD and CHF are all relatively flat versus the US dollar. The yen and Swissie are likely deriving some safe-haven demand as are the case with USD. The Loonie, meanwhile, is being supported by higher oil prices. Elsewhere, Sterling is deriving some support from better-than-expected Q1 2021 GDP data released this morning, as well as positive industrial production and trade balance data for the month of March. For reference, the UK economy only contracted at a QoQ rate of 1.5% in the first quarter of the year, despite being under a strict lockdown for nearly the entire three months. Q2 is expected to show a huge rebound with lockdown restrictions having been drastically eased in wake of a fast vaccine rollout and amid pent up demand. Industrial production, meanwhile, grew at a MoM pace of 1.8% in March (above forecasts for 1.0% growth) and the country’s trade deficit in March was smaller than expected at £11.7B (versus forecasts for £14.4B). GBPUSD is for now holding comfortably above the 1.4100 level and thus does not trade too far from weekly highs.
The Day Ahead
US April CPI at 1330BST is, as noted, the main event of the day and will likely set the tone for the rest of the session. Thereafter, some FOMC members will be speaking and it will be interesting to hear their reactions. There is also a 10-year US government bond auction at 1800BST, which could be a little wild as bond investors weigh up what the latest inflation numbers mean for bond markets. Elsewhere, US crude oil inventory data at 1530BST will be of note for energy traders.
