European markets got an afternoon leg up to the highs of the day, after US CPI came in below expectations, rising 0.1%, with the headline number falling from 6% to 5%.
Europe
The lower-than-expected number, while welcome is unlikely to change the likelihood of another 25bps rate hike from the Fed in May, given that core prices edged higher. On the margin, the initial reaction does suggest that markets think that any move in May, could well be the last in the rate hiking cycle, ahead of possible cuts by the end of this year.
It’s that last bit of the previous sentence where markets appear to be getting ahead of themselves, and this appears to have tempered some caution as we head into the close as markets retreat from their intraday highs.
The FTSE100 managed to claw its way back to the levels it was trading back on the 9th of March on the back of today’s data, while the DAX managed to push up to new 15-month highs, briefly pushing above the highs of last week in the process.
Today's outperformers have been the big caps of AstraZeneca, Shell and Glencore, with AstraZeneca getting a lift on the back of an upgrade from Morgan Stanley on optimism over its smart chemotherapy strategy. Glencore shares have remained choppy as investors assess the merits of its proposed acquisition of Canadian copper miner Teck Resources.
Travel and leisure is the worst performer with British Airways owner IAG at the bottom of the FTSE100 in the wake of this afternoon's profit warning from American Airlines in the US.
US
US markets opened higher in the wake of today’s March CPI report which showed headline inflation coming in below forecasts, at 0.1% month on month and 5% year on year.
The resultant slide in 2-year yields below 4% to as low as 3.87% initially helped drive gains with the Nasdaq 100 leading the way higher, however, the lack of follow-through on the downside and the pullback from those lows, suggests there’s plenty of uncertainty around the future direction of prices. This is largely down to the fact that while headline prices fell sharply, core prices increased, and are now above headline CPI, the first time that’s happened in over 2 years.
This rebound in yields from the lows of the day has acted as a drag on the Nasdaq 100 pulling it off its highs of the day, and into the red.
American Airlines is amongst the worst performers, after guiding that it expects to see its Q1 quarterly profits miss expectations due to higher costs. This warning is serving to weigh on the wider sector with Delta Airlines due to report its Q1 results tomorrow.
FX
The US dollar slipped back after headline CPI for March fell to 5% from 6%, rising less than expected on a monthly basis by 0.1%. This better-than-expected number also helped to push 2-year yields sharply lower, however on the core measure, prices rose on an annual basis to 5.6% from 5.5% in a move that markets appear to be choosing to ignore on the margin.
Today’s numbers are certainly moving in the right direction, and there is increasing evidence that inflation is slowing, however, that’s a long way short of central bankers looking to shift direction and looking to start cutting rates, which is what markets are currently pricing by the end of this year. Once again it appears that markets are looking at today’s data and drawing the wrong conclusions, which may help explain why yields have rebounded off their lows of the day.
The euro has edged back towards the top end of its recent range pushing back towards the 1.1000 area on comments from ECB policymaker Holzmann arguing for another 50bps move on rates at the May meeting, saying that the risks of doing too little outweigh the risks of doing too much. This hawkishness is helping to push German 2-year yields sharply higher, as they move sharply in the opposite direction to US 2-year yields which have drifted lower on today’s US CPI numbers.
The Canadian dollar has picked up from its lows of the day after the Bank of Canada left rates unchanged at 4.5%.
Commodities
Gold prices initially took a leg higher after today’s weaker-than-expected US CPI numbers pushing back to, but ultimately falling short of last week’s peaks, with the broader record highs behind that at $2,075, which remains the next key target. The rebound in US 2-year yields from their lows of the day appears to have tempered the upside momentum for the yellow metal today.
Crude oil prices have moved higher, largely on the back of today’s weaker US dollar than any optimism about the demand outlook.
Volatility
It was another broadly subdued day for market activity on Tuesday although the release of the latest USDA WASDE report helped push grains into focus. The broad trend here was that in the majority of instances, year-end stockpiles will be slightly higher than the market had been expecting. That resulted in some short-lived turbulence but left prices lower across the board. Corn was typical here with prices off by just over 1% on Tuesday but one day volatility sat at 24.51%, meaningfully up on the 21.86% monthly print.
Sugar however continued to progress higher as reported yesterday, with concerns over a tighter market as the year progresses weighing. The underlying added a further 2.3%, driving one day vol to 48.42% against 36.64% on the month.
Shares in Hong Kong saw a choppy start to the week, driving price action on the Hang Seng. There were a number of competing forces in play here, not least the long weekend and those military drills off Taiwan, alongside other macroeconomic factors. The local index traded in a 2% range early in the session, serving up a one-day vol print of 36.66% against 29.16% for the month.
Currency markets were largely muted with the only outlier here proving to be crypto asset Solana, with the underlying adding more than 10%. Both the general buoyancy of the sector along with the launch of a mobile specific platform for holders is seen as lending support to the alt coin. One day vol sat at 83.15% against 80.55% on the month.
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