Inflation’s Last Mile Gets Bumpier

For the week ending 15 March 2024

As of midday Friday, global equities were little changed on the week amid signs that progress toward central bank inflation targets is slowing. The yield on the benchmark 10-year US Treasury note rose 24 basis points to 4.32% from a week ago, and the price of a barrel of West Texas Intermediate crude oil gained $3 to $80.50. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 14.7 from 14 last Friday. 

MACRO NEWS

Hot inflation readings reduce rate cut odds

Little more than a week ago, markets priced in a 96% chance of a rate cut from the US Federal Reserve by June. But in the wake of stronger-than-expected US consumer and producer price indices, those odds were trimmed to 61% as investors questioned the timing and frequency of Fed rate cuts. The CPI report showed that the supercore measure (core services ex housing) rose 0.47%, an uncomfortably high level, though an improvement over January’s shocking 0.85% rise. Also notable was the first rise in goods prices in eight months. The PPI was also firmer than expected, though analysts project that the relevant components of the index that filter through to core PCE, the price measure that the Fed targets, should decline to 0.3% in February from January’s 0.42%. 

US retail sales disappoint 

US retail sales rebounded a less-than-expected 0.6% in February after declining 1.1% in January. Core retail sales, which strip out the sales of autos, gas and building materials, were flat. While retail sales account for only about 28% of consumption, along with the poor inflation readings, the data this week came with a whiff of stagflation. Also, this week, concern grew Wednesday’s Fed dot plot will show that Fed policymakers anticipate cutting rates only twice in 2024, not the three times shown in the December dots. 

As wages gain, BOJ appears headed for exit

Firmer wage settlements with Japanese labor unions, with pay hikes on the order of about 5.3%, appear to be setting the stage for the Bank of Japan to abandon its negative rate policy at next Tuesday’s rate-setting meeting. Japan’s Jiji Press reported Thursday that the decision to raise its short-term policy rate to zero from -0.1%. Jiji reported that the central bank will no longer target yields when purchasing Japanese government bonds and will instead purchase a fixed amount of bonds worth ¥6 trillion a month. The BOJ is also said to be considering ending equity ETF purchases. 

QUICK HITS

The Federal Reserve Bank of New York’s February Survey of Consumer Expectations showed that one- year inflation expectations held steady at 3%, though three-year expectations rose to 2.7% from 2.4% in January. In five years, respondents expected inflation to run at 2.9%, up from 2.5% the month before. 

Consumer prices in China rose for the first time in six months in February, gaining 0.7%. Producer process continued to decline, falling 2.7%. 

Unemployment in the United Kingdom averaged 3.9% for the three months ending in January, 0.1% higher than the quarter ending in December. However, average weekly earnings dipped to 5.6% from 5.8% the month before, a welcome cooling in persistent wage pressures. 

Under pressure from labor unions, US President Joe Biden said Thursday that US Steel must remain domestically owned and operated. The company had agreed in December to be acquired by Japan’s Nippon Steel. 

The European Central Bank announced that it will narrow the spread between its deposit rate and its main refinancing rate to 0.15% from 0.50 % beginning on 18 September. 

UK GDP expanded 0.2% month over month in January after declining 0.1% in December. 

By a vote of 352 to 65, the US House of Representatives passed a bill on Wednesday that would ban the popular short video app TikTok in the United States if its Chinese parent company does not divest its US operations. If the bill passes the Senate, President Biden has said he will sign it into law. 

The European Parliament this week passed sweeping legislation that imposes rules on developers of artificial intelligence applications. The mandates, which are set to take effect gradually over several years, ban certain AI uses, introduce new transparency rules and require risk assessments for AI systems deemed high-risk.

Saying she sees no broad-based move away from the dollar, US Secretary of the Treasury Janet Yellen said this week that the greenback remains the global reserve currency. 

The S&P 500 Index closed at a record 5,175.27 on Tuesday.

The International Energy Agency raised its forecast for world oil demand growth in 2024 by 110,000 barrels to 1.3 million barrels a day, citing a stronger US economic outlook and the increased need for ship fuel as vessels are forced to take longer routes to avoid Houthi attacks in the Red Sea.

New home prices in China declined for an eighth straight month in February, according to the National Bureau of Statistics. Prices fell 0.3%, the same pace as in January. 

On Tuesday, both President Biden and former President Donald Trump secured enough delegates to clinch their parties’ presidential nominations.

US industrial production rose 0.1% in February.