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US CPI and Fed minutes in focus

European markets have got off to a solid start to the week despite a warning from the IMF about the wider banking sector, and risks to growth more broadly.

Painting a bleak outlook for the global economy, the IMF laid out the possibility that interest rates could eventually fall back to the levels they were a few months ago, although declined to lay out a timeline for that.

US markets underwent a mixed finish with the Nasdaq 100 slipping back on the back of rising yields, while the Dow finished higher.

With markets currently in a bit of a “twilight zone” between Friday’s US payrolls report and today’s March CPI numbers, the picture with respect to the Fed’s next move on rates could well become a little bit clearer, even as last week’s economic data largely pointed to some softening in the US economy. 

Friday’s jobs report reset the bad data narrative of last week that had driven bond yields sharply lower, with the March payroll numbers seeing 236k jobs added, while the unemployment rate fell to 3.5% even as the participation rate rose to 62.6%.

Last week’s data appear to suggest that people are finally returning to the workforce as the cost of living continues to squeeze consumer finances. It also suggests that the JOLTs numbers will continue to come down, as more people return, having seen these numbers fall below 10m for the first time since May 2021 in February. Wages data fell from 4.6% to 4.2%.

Market reaction over the past couple of days has been for US 2-year yields to push back above 4%, after falling as low as 3.65% at one point last week.  

Friday’s jobs report also saw an upward revision to February to 326k, while seeing a downward revision to January to 477k from 504k.

All in all, despite some of the weakness seen in last week’s ISM numbers the US labour market continues to look resilient, with little sign of weakness at the moment, thus casting further doubt on the narrative that we’ll see rate cuts by the second half of this year.

Judging by the bond market reaction, Friday’s data also keeps the prospect of another 25bps rate hike on the table ahead of today’s US CPI numbers for March, which are expected to see core prices edge higher to 5.6% from 5.5%. This is what the Fed is most concerned about, particularly in services which has continued to rise, and will likely drive policy decisions going forward.

This is where the main focus of the central bank is likely to be from here on in even as today’s headline number is expected to improve with a fall from 6% to 5.1%.

Tomorrow’s March PPI numbers might add extra weight to the dovish narrative if they continue to fall sharply given that they tend to be much more forward-looking and act as a forward indicator for CPI.

While today’s CPI numbers are set to keep the pot boiling on the likelihood of a pause or a further 25bps rate hike at the start of May, tonight’s Fed minutes could offer a useful insight into the discussions at the previous Fed meeting, when the US banking system was undergoing significant turbulence due to the collapse of Silicon Valley and Signature Bank.

There had been some speculation in some quarters that the Federal Reserve might have looked at the possibility of a rate cut. In a lot of respects, any notion of a rate cut would have been absurd and could well have made matters even worse, and spooked the market even further.

Nonetheless, the turmoil did mean the Fed had to be much more careful about its messaging and despite going ahead with a 25bps rare rise, there was a notable shift in tone in the statement. The removal of the reference to “ongoing increases will be appropriate”, with “some additional policy firming may be appropriate”, was a sensible change, helping to give the Fed wriggle room to pause at the next meeting, if the data permits, as well as indicating that the end of rate rises could be close.

Today’s minutes are also likely to be instructive as to how seriously the option of a pause on rates was discussed, and whether in going down that route may have sent a signal that the Fed was more concerned with the current situation than markets would have liked.

Powell did admit that a rate pause was considered due to the banking crisis, however, the challenge for the Fed would always have been how to present this change without spooking the markets even more.

Powell did go on to say that the prospect of rate cuts this year was not being considered, which had been touted in some quarters as an option.

A cursory analysis of the latest dot plot chart confirmed that Fed officials were not considering cutting rates in the near future, although markets continued to stubbornly price that very possibility.

We also have the latest monetary policy decision from the Bank of Canada, which are expected to keep rates unchanged at 4.5%, for the second month in a row, as they continue to assess the ongoing effects of previous rate rises on the Canadian economy.

Thus far we’ve seen the latest jobs data hold up well, while headline CPI has continued to come down, even as the economy has managed to hold its own. Today’s decision is likely to be an “as you were” decision with little distinction from the language seen last month.

EUR/USD – still a rangebound market with resistance at the highs last week at 1.0980, with the 1.1030 area as the next key resistance. Found support at the 1.0830 area at the start of the week, with key support just below that at 1.0780.

GBP/USD – rebounded from the 1.2340 area after 4 days of declines, with the main resistance back at the highs of last week at 1.2530. Strong support currently at 1.2270, with further gains towards 1.2660 still preferred while above 1.2250.  

EUR/GBP – trend line support from the August 2022 lows continues to hold, currently at 0.8740. Below 0.8720 could see a move toward 0.8680. Currently need a close above the 50-day SMA at 0.8790. On the upside, we also have trend line resistance at the 0.8870/80 area.

USD/JPY – has broken above the highs of last week at 133.80, and is now looking to test cloud resistance at 134.50. Currently has cloud support at 132.20.

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