Markets Wrap (1H April)
US inflation stuck above 3%
Last week investors received a bleak US inflation report. March's price increase has accelerated to 3,5%, far higher than 3,2% just a month prior. This has been the 4th consecutive inflation miss in a row. It seems that This has plummeted any expectations of a dovish FED and now market is estimating less than two 0,25% rate cuts for this year, with the first one occurring not sooner than September. This has pushed US 10Y treasury yields to 4,6%, a figure not seen since last November.
A supporting thesis is that the economy is still growing at a great pace. The latest retail sales publication has marked significance outperformance and Atlanta FED GDP 1Q nowcast is indicating that US economy has grown 2,9% QoQ, far higher than economists have predicted at the start of the year.
ECB remains on track to cut interest rates in June
While the US has higher economic growth with above-target inflation, eurozone shows continued inflation path towards 2%, but with much slower economic growth. In its last monetary policy meeting the Governing Council kept interest rates unchanged, but strongly signaled dovishness and first rate cut during next meeting in June. ECB acknowledges that services inflation remains high and wage growth is still a concern, but President Ch. Lagarde pushed back against claims that high US CPI data will influence ECB to follow by FED and delay its rate cuts. It should be noted that euro zone policy rate market expectations have receded to around three 0,25% rate cuts for the whole 2024.
After a sizzling 1Q, equities started April on a sour note
After a great start of the year, first half of April has seen a 4% drop for S&P500 and around 3% for Europe's STOXX 600. Receding rate cut expectations, worries of an expanding conflict in the middle east and higher commodity prices have all added to poor equity returns. Furthermore, after what seemed to be forever, abnormally low volatility has finally come back alive and VIX index has climbed to long-term average levels.
China's 1Q GDP beat is not a recovery signal
China has reported 5,3% YoY GDP growth in 1Q, higher than Bloomberg's consensus forecast of 4,8%. This is a great start of the year keeping in mind the CCP's 5% GDP growth target. Growing manufacturing demand overseas and at home has been a key part of this increase. However, industrial output and retail sales slowed down in March, casting doubt on the current growth path. Furthermore, with China's real estate sector still in a prolonged crisis and domestic consumption stagnating government officials will have to increase stimulus to support growth.
Commodities bounce back
The last few months have seen a broad rebound in commodity prices and a resurgence in commodity price based inflation worry. While cocoa prices, which increased around 150% during this year was the biggest outlier, metals like iron, aluminum, silver and gold increased over 10% just over the last month. Oil prices have mostly stabilized in April after a 13% increase this year.
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