Inflation is sticky

Thoughts of the Day

US CPI for March rose +3.5% YoY (EXP +3.4%, PREV +3.2%), raising concerns that the US Fed may not cut interest rates soon. The US 2-year bond yield jumped +0.23% to 4.97% while the 10-year yield rose +0.19% to 4.55%. The probability of an interest rate cut dropped from 50% before the data release to 20%. The stock market sold off nearly 1% as risk sentiment weakened. The PPI to be released later today will be the key. If PPI also surprises to the upside, expect risk sentiment to weaken further.

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Day Ahead

The ECB is expected to keep interest rates at 4.50% in its monetary policy meeting.

The US Producer Price Index is expected to show that prices rose +2.3% Year-on-Year in March, up from +1.6% in February.

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What Happened Yesterday

Market Movements as of New York Close 10 Apr 24

The Reserve Bank of New Zealand kept its interest rates at 5.5% in its April meeting as expected. This marks the sixth time they’ve kept the rate unchanged. The central bank said this approach is right for helping to lessen inflation and other economic pressures. They think the rate should stay high for a while to help bring inflation back to their goal range. The NZDUSD rose slightly by +0.15% from 0.6058 to 0.6067 in immediate reaction.

The US Consumer Price Index showed that prices rose +3.5% Year-on-Year in March (vs +3.4% expected), up from +3.2% in February. The yearly increase in the Core index, which excludes food and energy prices, stayed at +3.8% (vs +3.7% expected). On a monthly basis, the CPI and core CPI both rose +0.4% as they did in Feb (vs +0.3% expected for both). The S&P 500 futures sold off -1.50% while the US 10 yr bond yields spiked +0.13% from 4.37% to 4.50% in immediate reaction to the data release.

According to the meeting minutes for its March meeting, the Federal Reserve’s officials talked about their worries that high inflation might last longer than expected and how recent data didn’t make them more confident about reducing inflation to their 2% goal. They discussed whether it’s riskier to keep their policy tight for too long or to loosen it too soon and miss their inflation target. Some believed factors like housing costs would start to decrease soon, and improvements in productivity could help the economy grow even as inflation drops. But overall, they were concerned about whether they were really getting inflation under control, especially since it seemed more manageable at the start of the year.

The Bank of Canada kept its main interest rate at 5% in April as expected. The central bank did not give hints about when it might start lowering rates because it’s still worried about persistent inflation. Although the cost of many goods and services has started to go down since their last meeting, uncertain economic conditions and high prices for things like oil are making it hard for inflation to decrease steadily. BOC Governor Macklem mentioned that recent data shows some signs of inflation slowing down, but it’s not enough to start reducing interest rates although there could be a possibility of rate cuts in June. The Bank thinks inflation will stay around +3% for the first half of this year and won’t hit their +2% goal until 2025. Immediate reaction was muted given the +0.65% spike in the USDCAD due to the US CPI data released earlier in the day.

The US Treasury Yield curve inversion widened to 0.42% as the US 2-year bond yield jumped +0.23% to 4.97% while the 10-year yield popped +0.19% to 4.55% due to the hotter than expected consumer price index data.

The US stock futures were subdued for the bulk of the Asian and London trading sessions yesterday as the market awaited the release of the US CPI data. The stronger than expected US CPI data then sent the S&P 500 futures down -1.50% in immediate reaction. The US stock market opened lower from Tuesday. It then remained at depressed levels for the bulk of the New York session. The S&P 500 finished -0.95% lower (high: -0.60%, low: -1.37%), the Dow Jones slipped -1.09% lower (high: -0.57%, low: -1.49%) while the Nasdaq fell -0.87% (high: -0.71%, low: -1.31%).

TSMC (NYSE: TSM) managed to eke out a +0.53% gain despite weakness in the broader market as it posted a surge in monthly revenue in March. March revenue came in at NT (New Taiwan Dollar) 195.2 billion up 34.3% year-on-year, the fastest pace of growth since Nov 2022. Q1’24 Revenue: NT$592.64 billion vs NT$581.45 billion expected.

The crypto market initially weakened due to the hotter than expected CPI print with Bitcoin and Ether falling as low as 67,191 (-2.9%) and 3,415 (-2.6%) intraday in immediate reaction to the US CPI data. However, the crypto market eventually shrugged off the weakness with Bitcoin and Ether up +1.57% and +1.10% respectively.
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Headlines & Market Impact

Hot inflation data pushes market’s rate cut expectations to September

Notable Snippet: March’s consumer price index report Wednesday helped verify worries that inflation is proving stickier than thought, giving credence to caution from Fed policymakers and finally dashing the market’s hopes that the central bank would be approving as many as seven rate cuts this year.

There’s also another risk in that “base effects,” or comparisons to previous periods, will make inflation look even worse as energy prices in particular are rising after falling around the same time last year.

The CME Group’s FedWatch tool, which computes rate-cut probabilities as indicated by futures market pricing, moved dramatically following the CPI release. Traders now see just a slim chance of a cut at the June meeting, which previously had been favoured. They have also pushed out the first reduction to September, and now expect only two cuts by the end of the year. Traders even priced in a 2% probability of no cuts in 2024.

“Today’s disappointing CPI report makes the Fed’s job more difficult,” said Phillip Neuhart, director of market and economic research at First Citizens Bank Wealth. “The data does not completely remove the possibility of Fed action this year, but it certainly lessens the chances the Fed is cutting the overnight rate in the next couple months.”

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Meta debuts new generation of AI chip

Notable Snippet: Meta Platforms (META.O) unveiled details on Wednesday about the next generation of the company’s in-house artificial intelligence accelerator chip.

The new Meta Training and Inference Accelerator (MTIA) chip is part of a broad custom silicon effort at the company that includes looking at other hardware systems too. Beyond building the chips and hardware, Meta has made significant investments in developing the software necessary to harness the power of its infrastructure in the most efficient way.

The chip has been deployed in the data centre and is engaged in serving AI applications. The company said it has several programs underway “aimed at expanding the scope of MTIA, including support of (generative AI) workloads.”

Taiwan Semiconductor Manufacturing Co (2330.TW) will produce the new chip on its “5 nm” process. Meta said it is capable of three times the performance of its first generation processor.

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Hong Kong set to approve its first spot bitcoin ETFs in April, sources say

Notable Snippet: Spot bitcoin exchange-traded funds could be launched in Hong Kong this month with the first approvals likely to be announced next week, two people familiar with the matter said.

Having lost much of its shine as a global financial hub due to restrictions during the pandemic, China’s faltering economy and Sino-U.S. tensions, Hong Kong authorities have been keen to do what they can to improve the city’s attractiveness for financial trading.

“The significance of Hong Kong ETFs is far-reaching as it could bring in fresh global investment as well as pushing crypto adoption to a new height,” said Adrian Wang, CEO of Metalpha, a Hong Kong-based crypto wealth manager.

At least four mainland Chinese and Hong Kong asset managers have submitted applications to launch the ETFs, the two sources said.

The Hong Kong units of China Asset Management, Harvest Fund Management and Bosera Asset Management are among the applicants, according to the two people and a third source.

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Stock Indices

Phan Vee Leung
CIO & Founder, TrackRecord