The headline Consumer Price Index (CPI) came in hotter-than-expected for March, and so the prospect of sticky inflation prompted markets to sharply adjust their Federal Reserve rate cut expectations. While the Producer Price Index (PPI) released the following session rose less-than-expected, somewhat helping to calm inflation concerns, markets are now eyeing either July or September for the first rate cut. This is a stark contrast to the 150bps of rate cuts traders had been pricing in at the beginning of the year. In response to the CPI data the 10-year Treasury note had touched its highest intraday level since November and ended the week at 4.52%.
Besides inflation, mounting tensions between Israel and Iran also weighed on sentiment, with the Cboe Volatility Index closing the week at its highest level since October. This helped boost the dollar, which already strengthened from the inflation release, seeing its best weekly performance since September 2022, up 1.7% against a basket of currencies. Gold also surged to an all-time high, notching a fourth weekly gain, while Brent crude had risen above $92 a barrel. Despite the gains in oil, the energy sector still saw a weekly loss, indeed all S&P 500 sectors experienced declines. Financials were some of the biggest laggards. This came as earnings season kicked off with big banks reporting. While better-than-expected earnings were reported, a cautious outlook from JP Morgan tempered optimism. For the week, the S&P 500 lost 1.6%, the tech-heavy Nasdaq fell 0.5% while the Dow Jones Industrial Average dropped 2.4% in its worst week in over a year.
The geopolitical tensions and the prospect of higher rates for longer in the US dampened the mood in Europe, although losses were less severe. The pan-European STOXX 600 ended 0.3% lower. The European Central Bank left its benchmark policy rate at a record high of 4%, but did signal that, provided inflation data continued to ease, a rate cut at its next meeting in June was on the cards. When asked if the uptick in US inflation would sway its policy path, President Christine Lagarde commented that the ECB was “data-dependent, not Fed-dependent”. Government bonds had ticked higher after the US inflation reading but pulled back after Thursday’s ECB meeting. Bucking the trend, the UK FTSE 100 notched a 1.1% gain, helped by weakness in sterling against the US dollar.
Japanese equity markets also saw weekly gains with the Nikkei 225 up 1.4%. Yen weakness against the US dollar continues to be closely watched, with the currency weakening below the 152 level, although this did not prompt any intervention from authorities. Hong Kong’s Hang Seng index ended little changed however on the mainland the Shanghai Composite suffered a 1.6% loss. Chinese inflation data underwhelmed, with the CPI seeing just a 0.1% annualised increase in March, while the PPI logged its eighteenth consecutive month in deflation. Adding further doubts to the economic rebound, exports and imports both saw declines to reverse gains seen in the first two months of the year.
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