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 trades about 0.5 per cent higher just shy of 8,000, while the Dax 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 fell 2 per cent, 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.
CPI in the US is forecast to have risen 0.3 per cent in March and 3.4 per cent from 12 months earlier, while core is seen at 0.3 per cent and 3.7 per cent, respectively. Investors have been dialling back expectations for a June cut by the Federal Reserve – the market action yesterday suggests caution ahead of the number. The market is becoming less convinced the Fed will cut in June – but remember this is an election year and there are other factors at work.
And even if inflation is hotter, I think we have already moved to the situation where the central banks are tacitly accepting they won’t get back to 2 per cent. 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 are positive for the debt burden. It’s the whole debt debasement trade (gold is soaring – investors don’t think central banks are going to tame inflation) – financing wars, immigration and ‘domestic bliss’ (in the words of Bank of America) is what it’s all about. And the FOMC thinks the neutral rate is about 2.5 per cent, 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 stuck to the same number of cuts (3). Treasury traders are super bearish and anything less than a hot CPI might see some big volatility. 3 per cent is the new 2 per cent
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 keeps on running higher, yesterday extending its six-month rally to a fresh all-time high as yields came down, 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 per cent extension.
The Trader is written by Neil Wilson, chief market analyst at Finalto
