All eyes on inflation again

Thoughts of the Day

The Fed remains focused on inflation data, particularly the PCE Price Index, to be released later this week. If it continues to show moderation towards their 2% target, they will move closer to cutting interest rates. Many bears seem to think that inflation will resurge, and the Fed is wrong to be talking about interest rate cuts. However, what the Fed says they will do and what they are doing is much more important than what we think they should do.

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Week Ahead

Monday: – 

Tuesday: The US Conference Board Consumer Confidence is expected to remain at 106.7.

Wednesday: The Australian Monthly CPI Indicator is expected to show that prices rose +3.6% Year-on-Year in Feb compared to +3.4% in Jan.

Thursday: The US GDP Growth Rate is expected to show an +3.2% increase in GDP on a quarterly basis in Q4’23, down from +4.9% in Q3’23.

The revised data for the US University of Michigan Consumer Data will be released.

Friday (Good Friday holiday): The Tokyo core Consumer Price Index is expected to show that prices rose +2.4% on an annual basis in Mar compared to +2.5% in Feb.

The US PCE Price Index is expected to show that prices rose +2.4% YoY in Feb as it did in Jan. The core index is expected to show that prices rose +2.8% YoY in Feb as it did in Jan.

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What Happened Yesterday

Market Movements as of New York Close 22 Mar 24 (24 March for Crypto)

Fedspeak:
Bostic (current voter, known hawk):
“I’m definitely less confident than I was in December that inflation will continue to fall towards the Fed’s 2% target.” He now expects just a single quarter-point interest rate cut this year instead of the two he had projected.
(Bostic is becoming more hawkish once again.)

In the Bank of Japan’s meeting minutes, it is shown that BoJ members agreed on the rising likelihood of hitting the Bank’s inflation target, and the prospect of doing so was gradually rising. Additionally, members said that if a price-wage spiral is confirmed, it will add to reasons to reverse policy. Reaction to the release was muted.

A terrorist attack (of which at least 137 are killed and 182 are injured) happened in Moscow over the weekend with 4 men charged for the attack at a concert hall. While Russian officials have claimed Ukrainian involvement (which Kyiv called absurd), the Islamic State group, or IS, said it carried out the attacks at Crocus City Hall.

The US Treasury Yield curve inversion widened to 0.37% as the US 2-year bond yield fell -0.03% to 4.59% while the 10-year yield slid -0.05% to 4.22%.

The US stock futures traded within a range through Asian and London trading hours with the S&P 500 futures down -0.10% when the New York session started. 

The US stock market opened almost unchanged from Thursday. Trading of the S&P 500 and the Nasdaq was muted. On the other hand, the Dow Jones traded weakly. The S&P 500 was down -0.14% (high: +0.09%, low: -0.22%), the Dow Jones decreased -0.77% (high: +0.11%, low: -0.78%) while the Nasdaq increased +0.10% (high: +0.36%, low: -0.29%).

The crypto market traded weak on Friday and Saturday, with Bitcoin and Ether reaching a low of 62,326 (-4.9%) and 3250 (-7.0%) respectively. It then started to stage a comeback on Sunday, recouping the losses made earlier.
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Headlines & Market Impact

Fed gets an earful about ‘stranglehold’ from high rates

Notable Snippet: Federal Reserve Chair Jerome Powell and fellow Fed governors on Friday heard firsthand from business and community leaders how the Fed’s interest rate hikes, along with ongoing price and labour market pressures, are affecting Americans.

Higher interest rates together with instability in commodity prices “has a stranglehold on the American agriculturalist right now, which leads to a stranglehold on all of rural America,” said Whitney Ferris-Hansen, who owns and operates J/W Farms and Ranch in Burlington, Colorado. “An increase in rates is always expected and planned for, but the speed at which these increases happened could not be risk-managed; we could not forward contract grain fast enough to hedge these interest rates.”

The “Fed Listens” event where Ferris-Hansen and five others spoke and answered policymakers’ questions was the latest in a series begun before the pandemic and designed to give U.S. central bankers a close look at the real-world effects of their rate-setting decisions.

Rising borrowing costs coupled with higher energy and transportation prices as well as rising wages are squeezing profits for small and medium-sized manufacturers, said Cara Walton, director at Southfield, Michigan-based Harbour Results, a consulting firm for small manufacturers. Some have stopped investing in new equipment because they cannot afford the more expensive financing coupled with slowing demand, she said.

Policymakers seemed particularly keen to hear from Svenja Gudell, chief economist at job website Indeed, who noted signs of a cooling labour market compared with the “frenzied” 2021-2022 period, especially in higher-paid sectors like technology where job postings have fallen the most. Food service and other lower-wage jobs offering benefits like health insurance and time off rose sharply in 2021 and early 2022, she said, but growth has since slowed.

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At major China chip fair, firms ramp up call to buy domestic

Notable Snippet: Chinese semiconductor-related companies pulled out all the stops at one of the country’s largest chip-sector fairs this week to pitch domestic buying, echoing Beijing’s call to galvanise support for an industry facing growing geopolitical strains.

The message was plastered across booths and marketing materials of a variety of companies, from chip equipment makers to materials producers. These included Vel-Tec Semiconductor, a Kunshan-based firm that makes photoresist coating equipment, and Shenzhen-listed Jingsheng (300316.SZ) which manufactures machines used for processing silicon wafers.

Over a dozen Chinese exhibitors at the annual SEMICON China show in Shanghai that Reuters spoke to said their products could be used as replacement for foreign-made ones. Staff from foreign firms that were represented said that while there was still a gap in quality and efficacy, Chinese rivals were quickly catching up.

“‘Buy local’ and getting supply chains out of US control was a clear focus of many at the show,” said Cameron Johnson, a Shanghai-based senior partner at consultancy Tidalwave Solutions, who has attended SEMICON since 2016.

Few U.S. firms turned up at the event that attracted 1,100 exhibitors and large crowds of visitors though there were several Japanese, South Korean, and Taiwanese companies. Big Chinese names such as the country’s largest foundry, SMIC (0981.HK) were also absent.

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Biden signs $1.2 trillion spending package for government funding until October

Notable Snippet: President Joe Biden on Saturday signed Congress’ $1.2 trillion spending package, finalising the remaining batch of bills in a long-awaited budget to keep the government funded until Oct. 1.

Almost halfway into the fiscal year, the president’s signature ends a months-long saga of Congress struggling to secure a permanent budget resolution and instead passing stopgap measures, nearly averting government shutdowns.

The weekend budget deal slid in just under the wire before the Friday midnight funding deadline, as has been typical this fiscal year with eleventh-hour disagreements derailing near-complete deals.

The Senate passed the budget in a 74-24 vote at roughly 2 a.m. ET Saturday morning, technically two hours after the deadline due to last-minute disagreements. However, the White House said that it would not begin official shutdown operations since a deal had ultimately been secured and only procedural actions remained.

The House passed its own vote Friday morning after a week of scrambling to reconcile a lingering sticking point: funding for the Department of Homeland Security, which the White House took issue with last weekend. The White House’s qualms delayed the negotiation process further, just as lawmakers were preparing to release the legislative text of the budget proposal.

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Phan Vee Leung
CIO & Founder, TrackRecord