Weekly focus – US inflation shakes up markets

A surprisingly high US inflation print this week triggered the biggest shake-up in US bond markets in more than a year. The US 2-year government bond yield closed 23bp higher on the day, which was the biggest one-day move since March last year. It reflects a further repricing of expectations for Fed policy with money markets now pushing the first cut out to September (priced with 90% probability). The reason was not so much the size of the upward surprise in core CPI which increased 0.36% m/m versus expectations of 0.3%. But it was the third month in a row with an upward surprise and the details showed a renewed worrying upward trend in the 'super-core' inflation of services excluding shelter and health care. The data also triggered a negative response in stock markets, although the decline was overall moderate (S&P500 down 1%). Equities are currently supported by a turn higher in the global manufacturing cycle, but the high inflation data may cap performance in the short term. The USD strengthened significantly on the numbers with EUR/USD moving from 1.087 to 1.07 on Friday, the lowest in two months.

On Thursday, the ECB decided to leave policy rates unchanged as unanimously expected. A rate cut looks set to come in June, subject to further confidence on the three criteria that have guided ECB policy making through the past year. The next to no new policy signals left markets largely unchanged. We continue to like our ECB rate call of a 25bp rate cut call in June, followed by further 25bp rate cuts once per quarter through the end of 2025. We see risks skewed to less than three rate cuts this year, though.

Commodity prices have been on the rise over the past weeks as a gradual recovery in the global manufacturing cycle is lifting demand. This week oil prices moved above USD90 per barrel coming from USD80 at the beginning of the year. The LMEX metal price index has saw a further increase this week and is now up 10% since early March. The upward pressure implies that global goods price inflation has likely passed the bottom and central banks will get no further help from this side.

While US inflation is too high, China is still struggling with too low inflation. Headline CPI fell back to 0.1% y/y in March from 0.7% y/y as a temporary lift in February related to the Chinese New Year holiday dropped out again. The low inflation reflects too weak demand and the government shortly after vowed to provide further consumer stimulus.

Over the coming week focus turns to US retail sales on Monday. The numbers have been softer lately, but decent income growth should keep it supported. US also releases the surveys from Empire and Philadelphia. In the euro area the main indicators due being German ZEW and Euro industrial production. For the UK, we get the labour market report for February/March on Tuesday, where focus will be on developments in wage growth. On Wednesday, inflation for March is released where we expect both headline and core inflation to moderate.  In China we get GDP for Q1 as well as the batch of industrial production, retail sales and housing data for March. Japan releases CPI inflation on Friday, which will be interesting following the change in BoJ policy lately. February inflation spiked to 2.8% on a base effect. Tokyo data indicated that price pressures remain well in line with the 2% target.

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