Markets Relieved As US Inflation Meets Expectations

For the week ending 31 May 2024

As of midday Friday, global equities were little changed on the week. The yield on the benchmark 10-year US Treasury note edged up to 4.50% from a week ago after trading as high as 4.635% on Wednesday in the wake of a series of subpar auctions. The price of a barrel of West Texas Intermediate crude oil rose $0.60 to $77.85 while volatility, as measured by the Cboe Volatility Index (VIX), rose to 13.6 from 12.1.

MACRO NEWS

US Core PCE meets expectations

Markets breathed a sigh of relief on Friday morning as the US Federal Reserve’s preferred inflation measure, the core personal consumption price deflator, met expectations. Prices rose 0.2% month over month in April and 2.8% year over year, and supercore inflation moderated. April consumer spending eased, rising 0.2%, lower than the downwardly revised 0.7% in March. The combination of softer consumer spending and no nasty inflation surprises helped bonds rally, pushing 10-year Treasury yields down to 4.50% from 4.55% just before the data.

US Q1 GDP revised down

Consumer spending was less robust in the first quarter than initially reported, revised US growth data revealed on Thursday. That shaved 0.3% from the growth rate, taking it down to 1.3% from an initial 1.6% reading. Final sales to domestic private purchasers was revised down to 2.8% from 3.1%, though the decline in consumer outlays was partially offset by stronger business and residential spending. One bright note was a -0.1% revision of the core PCE price index, putting it at 3.6%.

Current backdrop best one for stocks

According to analysts at BofA Global Research, accelerating EPS growth and slowing gross domestic product growth, the situation the market finds itself in today, is the best backdrop for stocks. Data going back to 1950 show that the S&P 500 Index grows by an average of 3.6% on a quarterly basis when economic growth is decelerating but corporate earnings are rising. That’s higher than the 2% average quarterly gain that has occurred during periods when both corporate profits and US GDP have accelerated.

Inflation rebounds internationally

Outside the United States this week, there were a number of upside inflation surprises, which helped boost bond yields. In Australia, consumer prices rose 3.6% year over year in April, above forecasts for a 3.4% rise. In Germany, inflation rose 2.8% in May, up from 2.4% in April, while Spain saw a similar rise of 3.8% from 3.4%. German bund yields hit their highest levels since November on Wednesday. On Friday, eurozone inflation surprised to the upside, rising 2.6%, up from 2.5% the month before, while the core measure rose to 2.9% from 2.7%. Markets continue to dial back rate cut expectations, though an ECB cut next week is fully priced.

QUICK HITS

The Swedish Security Service confirmed on Thursday that Iran is using criminal gangs in Sweden as proxies to “carry out acts of violence against other states, groups or people” that it considers a threat, particularly Israeli and Jewish interests.

The Federal Reserve Bank of Cleveland appointed Beth Hammack, a former Goldman Sachs executive, as president. Hammack will assume office on August 21. Current President Loretta Mester is set to depart on June 30.

Consumer inflation expectations in the eurozone fell in April to their lowest level since September 2021, according to the European Central Bank. Prices are seen as advancing 2.9% over the next 12 months, down from 3% in March, the ECB said.

China’s President, Xi Jinping, this week pushed financial regulators and local governments to take more responsibility for defusing risks and. Xi also called for them to strengthen the Communist Party’s role in the country’s financial sector.

The Case-Shiller US National Home Price Index rose 6.5% year over year in March.

After a strong first quarter and the announcement of additional stimulus measures, the International Monetary Fund raised its 2024 growth forecast for China to 5% from 4.6% and raised its 2025 outlook to 4.5%, up from 4.1% previously.

Former US President Donald Trump was convicted in state court in New York of 34 counts of falsifying business records. He is expected to appeal the verdict. Sentencing is set for 11 July.

Israeli national security adviser Tzachi Hanegbi said this week that he expects it will take seven more months of fighting to destroy Hamas.

The US Treasury auctioned two-, five- and seven-year notes this week. Amid weaker-than-normal demand, none of the auctions was well received. The US 10-year note yield reached a high of 4.635% on Wednesday afternoon after the seven-year auction though bonds rallied Thursday on the heels of the downside GDP revision.

The Beige Book, a collection of anecdotes from the Federal Reserve districts prepared in the weeks ahead of an FOMC meeting, showed that 10 of the 12 districts characterized growth as slight or moderate. The report described retail sales as flat to slight, reflecting lower discretionary spending and heightened price sensitivity among consumers. Job growth was depicted as negligible to modest in eight of 12 districts.

This week’s shift to one day (“T+1”) equity trade settlement in the US went off without a hitch. Depository Trust & Clearing Corporation data showed no rise in failed trades.

China’s Xinhua News Agency reported Thursday that if Israel stops its attacks in Gaza, Hamas is ready to reach “full agreement” on a deal to stop the fighting and exchange hostages for prisoners. Meanwhile, Israel this week gained control of a strategic corridor along the border between Gaza and Egypt in an effort to cut off Hamas tunnels used to smuggle weapons and goods.

Federal Reserve Bank of New York President John Williams reiterated on Thursday that he sees no urgent need to adjust monetary policy. Williams said he sees ample evidence that policy is restrictive and that he expects inflation to resume easing in the second half of the year. Rate hikes, he said, are unlikely.

South Africans went to the polls on Wednesday, and while the votes are still being counted, the ruling African National Congress party appears to be falling short of a majority for the first time since it took power when apartheid ended three decades ago. Without a majority, the ANC would need help from other parties to reelect President Cyril Ramaphosa to a second term. Elections will also be held this weekend in India and Mexico.

Bloomberg reported that the US has slowed the issuance of export licenses to AI chipmakers that permit them to ship advanced semiconductors to countries in the Middle East. Part of the concern, the wire services reported, is that Chinese companies could potentially access the chips through data centers in the region.

China’s manufacturing sector slipped back into contraction in May while services activity moderated, purchasing managers’ indices showed. Economic sentiment remains muted amid continued pressure on the country’s property sector.

In June, net government bond supply is likely to rise to $340 billion for the US, eurozone countries and Britain, according to data from BNP Paribas, an amount that could potentially put upward pressure on bonds yields.

Canadian GDP rose 1.7% in the first quarter, well below forecasts of a 2.2% rise. The soft growth data boosted the odds to 85% that the Bank of Canada will cut rates at next week’s meeting.