Macro-News round-up

โœจ Yesterday was a mirage in the US. On the one hand, lower than expected inflation data. On the other hand, a speech by Jerome Powell suggesting the possibility of cutting interest rates this year. Stock markets have accepted this narrative as valid, but things are not what they seem.

๐Ÿ“‰ Inflation is not receding. US annualised inflation yesterday came in at 3.3%, against an expected 3.4%. In June 2023 inflation was at 3%, in November 2023 and in January 2024, it was at 3.1%. So, have we really improved the outlook?

๐Ÿค” Jerome Powell’s suggestion of a rate cut this year is exactly the same as the one he gave in December 2023. It seems that investors need to be reminded, that promise was not fulfilled until today, why should this new suggestion be fulfilled?

๐Ÿ“ˆ If its objective is to defend price stability, monetary policy should be extremely restrictive, not because inflation has been above 3% for more than a year, but because cumulative inflation has had a strong impact on the purchasing power of the public since 2021.

๐Ÿ”ฎ What we may see, however, is a capitulation by the monetary authorities, identical to the case of the European Central Bank ECB, which has cut rates even though core inflation in Europe and Germany has picked up in the last period. I guess the dilemma will always be the same, economic growth or price stability? Reform and cleaning up the books, or continuing to feed the irrational cycle?

๐Ÿ“Š Market: The important thing is that the market has taken yesterday’s events as a positive event. The mini SP500 futures have broken through the barriers that have been holding it back for the last few days and is trading close to 5500 points, a new all time high. The Nasdaq 100 has reached 19,600 points and is retreating in the last few hours from these new records.

๐Ÿ’ต The dollar index DXY fell back from 105.50 points to 104.30 points. The 200 moving average on this index has been flat for more than a month, which is evidence of the uncertainty the market has about what will happen to interest rates and the dollar.

๐Ÿ’ถ The EURUSD, which had weakened sharply after the European election results, falling below 1.0750, has recovered strongly and has been close to 1.0850 in the last hours, a 100 pips rise since Powell’s words.

๐Ÿ“‰ Nevertheless, European stock markets are not too optimistic. The Dax 40, which yesterday recovered part of the post-election falls, has fallen back below 18,500 points, undoing the recovery. The Cac 40 continues with the fall that began after the elections, and is about to lose new lows, approaching the levels of the beginning of the year. If this continues, the next few days could see the index approach the 7500 point mark.

๐ŸŒ Geopolitics:

๐Ÿค G7 leaders reach a “provisional” agreement to lend Ukraine $50 billion in frozen Russian assets. This weekend it is expected that after the G7 meeting in Italy, the final measures for the use of Russian assets and their yields to finance the war in Ukraine will be announced. As we have commented in previous reports, we suspect that it is this decision that is likely to be fuelling the gold market, as other countries such as China, in the face of these actions, increase their distrust and decide to unwind positions in western assets.

๐Ÿš— On the other hand, yesterday we already gave details about the protectionist measures that the European Union will apply against the Chinese electric car industry. They are in addition to the tariffs announced by the United States against China. The trade war is more alive than ever. Steak costs for shipping are returning to 2022 levels. All this points in one direction, new inflationary shock approaching on the horizon. Trade sanctions are also strongly related to the military aspect. The US wants to prevent both China and Russia, via China, from acquiring new generations of US-produced high-throughput chips.

๐Ÿ‡ซ๐Ÿ‡ท The French right is in disarray. The leader of the right-wing Republican party, ร‰ric Ciotti, was abruptly dismissed by senior party officials after announcing a pact with Le Pen’s right-wing party, which is leading in voting intentions in France. The political elites seem to be trying once again to prevent Le Pen from gaining power. And they have reason to be worried, since a few years ago, one of the promises she made was that France would leave the euro if they came to power.