A price pressure reprieve but a sticky services proposition

Markets

Tech stocks spearheaded Thursday's market resurgence, propelling the Nasdaq Composite to its sixth record close of 2024.

Several top-tier companies saw notable gains as we approached the earnings season window. Nvidia surged by 4.1%, while Amazon climbed 1.7%, reaching an all-time high during the session. Alphabet also posted a gain of more than 2%. Additionally, Apple saw a significant increase of 4.3% following an insider report that the company plans to transition its Mac product line to chips focused on artificial intelligence.

Investors found some solace in slightly subdued wholesale-price growth, alleviating worst-case inflation concerns of yet another overshoot. The most recent producer-price inflation data, released early Thursday, fell slightly below economists’ expectations.

Fortunately for stock market participants grappling with a group rethink about a far less dovish trajectory of Fed policy in 2024, producer pipeline inflation appeared relatively benign in March.

Despite a slight stock picker reprieve following another vexing CPI report, cross-assets market sentiment is still betwixt by less dovish Fed implications that continue dominating the scene. The US dollar maintains its stronghold as US yields stay elevated. Notably, the 10-year Treasury yields increased to 4.575%, even after experiencing their most significant one-day surge since September 2022. Bond traders await further clarity on inflation dynamics, possibly next month’s numbers, or tangible signs of economic deceleration before even considering rounding up the rally wagons.

Traders continue to observe a subdivide in the economy's disinflationary trends. The third consecutive rise in the sticky PPI services gauges contrasts with a 0.1% decline on the goods side, marking the fifth monthly decline in six months.

While disinflation appears evident in various sectors, persistent price pressures, particularly in the services sector, continue to linger. This suggests that the last mile to achieve the 2% normalization target could prove challenging, if achievable at all.

So it is unlikely the PPI data is an alls well ends well the type of print. Ultimately, the fate of any stock market rally rests on Q1 earnings season — the bedrock of fundamentals.

In other news, initial jobless claims came in at 211,000, below estimates, underscoring the persistence of a tight labour market.

Oil Markets

Oil futures ended Thursday's session in the red, reflecting concerns over weakening domestic demand for fuel amidst apprehensions about inflation's impact on consumer spending. Persistent inflationary pressures, particularly in the service sector, have led investors to revise their expectations, now anticipating that the Federal Reserve may delay interest rate cuts until the year's fourth quarter. Given the historical correlation between distillate fuel demand and economic activity, the combination of inflationary pressures and prolonged high-interest rates could potentially hamper both business growth and consumer spending. Nonetheless, oil prices remained elevated, hovering near 2024 highs, fueled in part by geopolitical tensions after the US issued warnings of a potential attack by Iran on Israeli assets. Benchmark US crude settled just above $85 a barrel, maintaining its elevated position amidst broader market uncertainties.

Forex Markets

The breach of the 152.00 level in USD/JPY has prompted the typical remarks from Tokyo, with both Vice Finance Minister Kanda and Finance Minister Suzuki cautioning against excessive FX movements, noting that recent moves have been "rapid." Kanda emphasized that FX movements "since the beginning of the year are significant," hinting that this period could be used to justify intervention.

Ultimately, if the Ministry of Finance ( MOF) chooses to intervene, it can justify it under the G20 framework due to the extreme levels. Tokyo's warnings will soon lose credibility; hence, they might need to use the intervention axe soon, so perhaps one more significant USD surge may be needed to justify it more explicitly. But the longer Tokyo remains absent, the more likely traders will think their warnings ring hollow. Indeed, this is what we are seeing in the market right now as traders test the MOF’s intervention resolve with US dollar demand being supported by higher US yields.