Inflation persists but…

Thoughts of the Day

The PCE Price Index showed that price rises are more persistent than expected. The headline index rose +2.7% YoY (EXP +2.6%, PREV +2.5%) while the Core index rose +2.8% YoY (EXP +2.6% PREV +2.8%). However, the stock market rallied on optimism from tech earnings. The S&P500 rose 1% and the Nasdaq rallied 1.7%. The market reacted with relief that the actual bad news being less bad than feared.

Next significant event -> FOMC on Wednesday.

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Week Ahead

Monday:

Tuesday: Chinese PMIs (NBS Manufacturing PMI: 50.3 expected and 50.8 prev, NBS Non Manufacturing PMI: 52.2 expected and 53.0 prev)

Euro Area Inflation (Headline: +2.4% YoY expected and prev, Core: +2.6% YoY expected and +2.9% prev)

Wednesday: US ADP Employment Change (+179k expected and +184k prev)

US JOLTS Job Openings (8.68M expected and 8.756M prev)

US Federal Reserve Meeting (interest rates to remain unchanged at +5.5%)

Thursday: Bank of Japan Meeting Minutes

Friday:  Euro Area Unemployment Rate (6.5% expected and prev)

US Nonfarm Payrolls (+243K expected vs +303k prev),  US Unemployment Rate (3.8% expected and prev)

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What Happened Yesterday

Market Movements as of New York Close 26 Apr 24 (28 Apr for Crypto)

US PCE Price Index showed that prices rose +2.7% YoY (vs +2.6% expected and +2.5% prev). Core index rose +2.8% YoY (vs +2.6% expected and +2.8% prev). On a monthly basis, headline and core number both rose +0.3% as expected and same as previous. The S&P 500 futures spiked +0.42% in immediate reaction but the rise in price was reversed quickly. Although inflation was a touch higher than expected, it was a relief to investors as it was not as bad as feared given the recent disappointments on the inflation front.

University of Michigan Consumer Survey (inflation expectations for the year ahead: +3.2% actual vs +3.1% expected and +2.9% prev, 5-year horizon: +3% actual and expected and +2.8% prev, consumer sentiment 77.2 actual vs 77.8 expected and prev: 79.4).

The US 2-year bond yield rose +0.01% to 5.00% while the 10-year yield fell -0.03% to 4.67% resulting in the US Treasury Yield curve inversion widening to 0.33%. 

The US stock futures spiked higher following the earnings report from Google, Microsoft and Snap and remained at elevated levels through the Asian and London trading sessions. The S&P 500 futures was up +0.57% when the New York session began.

The US stock market opened higher from Wednesday (S&P 500: +0.72%, Dow Jones: +0.08%, Nasdaq: +0.78%). It then rose moderately through the New York session. The S&P 500 finished +1.02% higher on the day (high: +1.31%, low: +0.49%), the Dow Jones rose +0.40% (high: +0.66%, low: -0.05%) while the Nasdaq spiked +1.65% (high: +1.96%, low: +0.78%).

The crypto market continued to have minute price action over the weekend.
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Headlines & Market Impact

All the data so far is showing inflation isn’t going away, and is making things tough on the Fed

Notable Snippet: In the aggregate, Commerce Department indexes that the Fed relies on for inflation signals showed prices continuing to climb at a rate still considerably higher than the central bank’s 2% annual goal, according to separate reports this week.

Within that picture came several salient points: An abundance of money still sloshing through the financial system is giving consumers lasting buying power. In fact, shoppers are spending more than they’re taking in, a situation neither sustainable nor disinflationary. Finally, consumers are dipping into savings to fund those purchases, creating a precarious scenario, if not now then down the road.

Put it all together, and it adds up to a Fed likely to be cautious and not in the mood anytime soon to start cutting interest rates.

“Just spending a lot of money is creating demand, it’s creating stimulus. With unemployment under 4%, it shouldn’t be that surprising that prices aren’t” going down, said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “Spending numbers aren’t going down anytime soon. So you might have a sticky inflation scenario.”

Indeed, data the Bureau of Economic Analysis released Friday indicated that spending outpaced income in March, as it has in three of the past four months, while the personal savings rate plunged to 3.2%, its lowest level since October 2022.

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WEF president: ‘We haven’t seen this kind of debt since the Napoleonic Wars’

Notable Snippet: Borge Brende, president of the World Economic Forum, gave a stark outlook for the global economy saying the world faces a decade of low growth if the right economic measures are not applied.

“The global growth [estimate] this year is around 3.2 [%]. It’s not bad, but it’s not what we were used to — the trend growth used to be 4% for decades,” he told CNBC’s Dan Murphy, adding that there was a risk of a slowdown like that seen in the 1970s in some major economies.

“We cannot get into a trade war, we still have to trade with each other,” he explained when asked about avoiding a period of low growth.

“Trade will change and global value chains — there will be some more near-shoring and friend-shoring — but we shouldn’t lose the baby with the bathwater … Then we have to address the global debt situation. We haven’t seen this kind of debt since the Napoleonic Wars, we are getting close to 100% of the global GDP in debt,” he said.

He said governments needed to consider how to reduce that debt and take the right fiscal measures without getting into a situation where it kicks off a recession. He also motioned persistent inflationary pressures and that generative artificial intelligence could be an opportunity for the developing world.

His warning chimes with a recent report from the International Monetary Fund which noted that global public debt had edged up to 93% of GDP last year, and was still 9 percentage points higher than pre-pandemic levels. The IMF projected that global public debt could near 100 % of GDP by the end of the decade.

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US regulators seize troubled lender Republic First, sell it to Fulton Bank

Notable Snippet: U.S. regulators have seized Republic First Bancorp (FRBK.PK) and agreed to sell it to Fulton Bank, underscoring the challenges facing regional banks a year after the collapse of three peers.

Philadelphia-based Republic First, which had abandoned funding talks with a group of investors, was seized by the Pennsylvania Department of Banking and Securities.

The Federal Deposit Insurance Corp (FDIC), appointed as a receiver, said on Friday Fulton Bank, a unit of Fulton Financial Corp (FULT.O) will assume substantially all deposits and purchase all the assets of Republic Bank, which is the operating name for Republic First, to “protect depositors”.

Republic Bank had about $6 billion in total assets and $4 billion in total deposits, as of Jan. 31, 2024. The FDIC estimated the cost of the failure to its fund will be $667 million. Apart from deposits, Republic also had borrowings and other liabilities of approximately $1.3 billion, Fulton said in a statement.

The decision marks the latest U.S. regional bank failure following the unexpected collapses of three lenders – Silicon Valley and Signature in March 2023 and First Republic in May.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord