📈 Macro-News round-up

🤔 Yesterday, Expectations about the date of the first Fed rate decrease were all but dashed by the combination of the Fed minutes and a stronger-than-expected US inflation data, resulting in a 3.5% in March. Members of Federal Reserve noted that recent data had not increased confidence that inflation was coming down sustainably to 2%. Sound familiar? We have insisted since December that the rate cut lacked the data to justify it. For two reasons: First, inflation has been zigzagging around 3% since June 2023. Second, the unemployment rate is not increasing, but even decreasing, putting upward pressure on inflation via wages.

📉 Market Reaction: The S&P and NASDAQ had little declines of 0.95% and 0.84%, respectively, while the Dow Jones fell 1.09%. As a result of the potential Fed delay, bond rates increased, with the 10-year yield rising 18 basis points and the 2-year yield rising a striking 23 basis points. In addition, the DXY dollar index has again shot upwards, and is already trading above 105 points, currently at 105.25 points.

🔮 All of this is exactly the scenario we foresaw and have described in past reports.

🛢️ Commodities: In this context, with bonds yielding higher and the dollar strengthening, we would expect a cooling of commodities. However, this is not the case. Yesterday afternoon, the United States put out a warning of a suspected imminent Iranian missile attack on Israel. This is keeping commodity markets on edge. Brent Crude is trading above $90 a barrel, and gold remains above $2300 an ounce.

📈 The surprise on US macroeconomic data may not be over. This afternoon we will have PPI data, and considering the rise in fuel prices in recent weeks, it could put upward pressure on this index, in which case, the risks of a new inflationary wave would increase. A PPI of 0.3% is expected for March.

🇪🇺 Europe: Today the ECB decides on its interest rates. It faces a complicated dilemma. Non-energy goods prices rose 1.1% during the previous month. Compared to this, services prices rose 4%. This shows that the highest inflation is concentrated in the labor-intensive services sector. For these reasons, the ECB expects the unemployment rate in the euro zone to rise, which would contain labor costs and ensure a reduction in inflation via services. To achieve this goal, the ECB was using high interest rates. However, the problem is that the euro zone is now starting to show signs of economic recession. Further pressure on interest rates will push Europe deeper into that recession. But if they cut interest rates, they run the risk of causing inflation not to fall or even to rise.

🔮 The market is discounting that the ECB will cut rates in June. This means the ECB has a little over a month to see some changes in the numbers. Either a reduction in inflation via services, or a rise in unemployment that reduces labor costs. If not, the ECB will find itself in a similar situation to the Fed. But it is important to note that Europe’s situation would be much worse than that of the United States. Because it lacks economic growth, and if it presents new increases in inflation, it will enter a stagflation scenario, which is one of the worst situations for an economy, because it means an increase in unemployment and an increase in living costs simultaneously.

🇨🇳 China: Early this morning we had the release of China’s inflation rate. Inflation was expected to be 0.4% compared to 0.7% in the previous period. However, the result was 0.1%. Quite a bit lower than expected. This could indicate a weaker than expected economic activity, during 2023 we had several indicators that put us on alert about risks of fractionalization in China, these data could rekindle those fears.

⚖️ On the other hand, a low inflation rate would be good news, if China’s intention was to stimulate via monetary policy, it would minimize the inflationary effects of cutting rates. However, China’s problem today is different. It does not employ a more expansionary monetary policy why the RMB yuan exchange rate against the dollar is at an all-time low. The USDCHN is trading at 7.25 with an all-time high near 7.35. If they expand their money supply, they run the risk of liquefying their currency too much, which would make China’s energy costs more expensive.

🇺🇦 Geopolitics: Yesterday, the senior US general in Europe, Christopher Cavoli, informed Congress that, in the absence of US assistance, Ukraine will “in fairly short order” run out of artillery rounds and air defence interceptors, making them susceptible to a partial or complete loss.

😨 This would explain the apparent desperation of a political class in Europe with little popular support, which has been insisting for the past few months that the citizens of the rest of Europe have to prepare for war. They seem to prefer a flight forward, pushing Europe towards an all-out war. Especially considering, that the favourite candidate to reach the White House, will definitely end the conflict. According to Donald Trump, the current administration will lead us to World War III rather than lose the election.

🕊️ Yesterday, Switzerland confirmed that it will host the Peace Conference on Ukraine in mid-June. We do not yet know whether this is a political show rather than a real solution. For, of the two parties involved in the conflict, only one is invited. Therefore, it is not a negotiation to reach a peace agreement. In any case, the attendance of China, which seems to be more neutral than the US (who declares Russia as an existential threat) is still to be confirmed.