Stocks firmer ahead of US inflation, CPI forecast at 3.4%

FTSE, DAX index, U.S. stocks firmer ahead of US inflation print

European stock markets are firmer this morning ahead of the US inflation report, clawing back pretty much what they gave away yesterday. The FTSE 100 index trades about 0.6% higher just shy of 8,000, whilst the DAX index was firmer in early trading as it attempts to arrest a two-week decline off its all-time high. 

US futures were a bit firmer after Wall Street was essentially flat on Tuesday. Nvidia shares fell 2%, Apple bounced a bit; but both are displaying signs of stress that could signal concerns for the wider market – healthy rotation or something more sinister? Today’s inflation print may be a big catalyst. 

Higher for Longer... For Longer?

US CPI is forecast to have risen 0.3% in March, +3.4% from 12 months earlier, whilst core is seen at +0.3% and +3.7% respectively. Investors have been dialling back expectations for a June cut by the Fed – the market action yesterday suggests caution ahead of the number. The market is become less convinced the Fed will cut in June – but remember this is an election year and there are other factors at work.

3% is the New 2%

Even if inflation is hotter, I think we have already moved into the situation where the central banks are tacitly accepting, they won’t get back to 2%. Suppressing yields and pushing up inflation has been their stated aim for well over a decade – why change now?

Hiking interest rates into lots of unemployment and recession was never the plan. Crucially, higher inflation and suppressed yields is positive for the debt burden. It’s the whole debt debasement trade (gold is soaring – investors don’t think CBs are going to tame inflation) – financing wars, immigration and ‘domestic bliss’ (in the words of BofA) is what it’s all about.

And currently the FOMC thinks the neutral rate is about 2.5%, which means there are 300bps of cuts just to get to neutral. Remember the last projections from the FOMC raised the core PCE inflation rate for 2024 but stick to the same number of cuts (3). Treasury traders are super bearish, and anything less than a hot CPI might see some big volatility.

No Bulls in the China Shop

Elsewhere, Fitch cut its outlook on China to negative due to the “double whammy of decelerating growth and more debt”.  Debt, debt everywhere…no wonder gold is doing what it’s doing.

Gold Price Keeps Glittering

The gold price keeps on running higher, yesterday extending its 6-month rally to a fresh all-time high as yields subsided, though the correlation between gold and rates has completely broken down.

It came back down a touch this morning, with the dollar rebounding off an almost-three-week low. Looks like gold has run into some technical resistance around the 1.618% extension.

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