US Inflation Stays Stubbornly High

For the week ending 26 April 2024

As of midday Friday, global equities were firmer on the week, though trading was choppy. Easing geopolitical concerns and generally upbeat earnings reports helped offset interest rate jitters. The yield on the US 10-year Treasury note rose to 4.67% from 4.63% a week ago, though it traded as high as 4.735% on Thursday amid sticky inflation readings. The price of a barrel of West Texas Intermediate crude oil edged up to $84 from $83.10 a week ago. Volatility, as measured by the Cboe Volatility Index (VIX), fell to 15.4 from 18.7 last Friday.

MACRO NEWS

Sticky US inflation pushes yields higher

US 10-year Treasury yields traded as high as 4.735% on Thursday after the core PCE price index measure used to calculate Q1 GDP rose 3.7% quarter over quarter despite the economy expanding at a slower-than-expected 1.6% annual rate. Friday’s monthly core PCE measure, released along with personal income and spending data, rose 0.3% month over month and 2.8% year over year. While the GDP figures were lower than expected, consumer spending remained robust, with most of the drag on growth coming from elevated levels of imports and a build in inventories. In March, personal income rose 0.5% while personal spending grew 0.8%. Markets headed into Friday’s data fearful of another upside inflation surprise after Thursday’s data, so yields edged lower to around 4.67% as Friday’s numbers came in close to forecasts. However, January and February core PCE readings were revised up, making the path of future US Federal Reserve rate cuts less certain. Markets currently anticipate one rate cut before year end, in November.

US bans noncompete clauses for many

The US Federal Trade Commission on Tuesday issued a rule that prohibits companies from enforcing existing noncompete agreements on anyone other than senior executives. The FTC says that noncompete clauses, which typically prevent workers from taking a new job or starting a business for a certain time period after leaving an employer, hamper competition for labor and result in lower pay and reduced benefits for workers. Businesses that use them say they are an effective way to protect their intellectual property, customer relationships and other investments. Several business groups immediately sued to block the ban in federal court.

DOL issues new fiduciary rule

The US Department of Labor this week approved a rule that would extend the fiduciary requirements under the ERISA law to all advisers, brokers and insurance agents who provide advice on individual retirement accounts, including rollovers. The change begins going into effect on 23 September and the industry will then have a year to fully comply. Earlier efforts to impose a fiduciary rule have been struck down or narrowed by the courts. 

QUICK HITS

According to a University of Michigan survey, one-year inflation expectations rose to 3.2% from 2.9% in April, while 5 to 10-year inflation expectations rose to 3% from 2.8%.

The Bank of Japan kept rates unchanged at its Friday meeting despite rapid yen depreciation this week. BOJ Governor Kazuo Ueda downplayed the weak currency’s impact on inflation, setting off another wave of yen selling. Markets are on guard for potential intervention to halt the slide, which reached 157.39 to the dollar, a fresh 34-year low.

Beginning 1 July, the Swiss National Bank will increase its minimum reserve ratio to 4% from 2.5%. For comparison’s sake, the European Central Bank minimum reserve ratio is 1%.

ECB Vice President Luis de Guindos said this week that a June rate cut seems like a “done deal” in the absence of an inflation shock.

US new home sales rose 8.8% month over month in March to a 693,000 annual pace, a much-stronger- than-expected outcome. March pending home sales rose 3.4% from February.

The US Congress passed a bill this week authorizing President Joe Biden to seize Russian dollar assets, but according to Bloomberg, the majority of the approximately $280 billion in Russia’s frozen funds lie in the European Union, where a number of countries, including Germany and France, have expressed reservations over the legality of outright seizure.

Retail sales in Canada fell for a second straight month in February, declining 0.1%.

China summoned Germany’s ambassador on Thursday after four Germans were arrested on suspicion of spying for China.

The total fertility rate in the United States fell to 1.62 births per woman in 2023, a two percent decline from a year earlier, federal data released Thursday showed. That’s the lowest rate recorded since the government began tracking the data in the 1930s.

Consumer confidence in Germany rose to its highest level in two years, according to the GfK survey released Thursday. The Ifo business climate index also showed a marked uptick this week.

South Korea’s economy expanded at a greater-than-expected 3.4% year over year in the first quarter, the Bank of Korea reported.

On Thursday, the leaders of 18 nations, including the US, called for the immediate release of hostages held by Hamas in Gaza.

Spanish Premier Pedro Sanchez said he is considering resigning amid an investigation into potential influence peddling by his wife.

French President Emmanuel Macron is said to favor installing former ECB president and Italian prime minister Mario Draghi as the head of the European Commission, replacing Ursula von der Leyen, whose terms is set to expire in coming months.

On a visit to Shanghai, US Secretary of State Antony Blinken called on China to level the playing field for US businesses operating in the country.

After months of disagreement, the US Congress passed a bill that provides $95 billion in foreign aid for Ukraine, Israel and Taiwan. President Biden signed the bill into law Wednesday and said aid would start flowing to Ukraine within hours.

The FTSE 100 closed at a record high 8078.9 on Thursday amid solid earnings from British blue chips and a takeover bid for miner Anglo American. 

EARNINGS NEWS

With about 45% of the constituents of the S&P 500 Index having reported for Q1 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) shows that earnings slightly rose around 3.3% compared with the same quarter a year ago, according to data from FactSet. Sales growth is up 4% year over year.