Inflation surprised to the upside but… 

Thoughts of the Day

The US CPI rose higher than expected, +3.2% (EXP +3.1%, PREV +3.1%). The core index also exceeded forecasts, +3.8% (EXP +3.7%, PREV +3.9%), and although it is not as low as the market expected, it is still near the lowest levels in 3 years. Initially the stock market sold off, but markets later rebounded strongly, ended the day up nearly +1.5%. The reaction was confusing for investors because higher than expected inflation should be bad. However, disinflation continues and the Fed is “not far” from cutting rates.

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Day Ahead

Nothing noteworthy on the horizon today.

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What Happened Yesterday

Market Movements as of New York Close 12 Mar 24

The US Consumer Price Index (CPI) showed that the annual inflation rate rose to +3.2% in Feb 2024 (vs +3.1% expected), up from +3.1% in Jan. The decline in energy expenses was less steep than expected, with a decrease of -1.9% compared to January’s -4.6%. The rise in prices was more moderate for food (+2.2% vs +2.6%), shelter (+5.7% vs +6%), new vehicles (+0.4% vs +0.7%), and medical care services (+2.9% vs +3%). Meanwhile, core inflation, which excludes volatile food and energy prices, softened to +3.8% (vs +3.7% expected) from +3.9%. The monthly overall inflation rate increased to +0.4% from +0.3% as expected, largely influenced by shelter and gasoline costs, which accounted for more than 60% of the rise. The core monthly inflation rate held steady at +0.4%, against the expected +0.3%.

The US Treasury Yield curve inversion widened to 0.42% as the US 2-year bond yield rose +0.07% to 4.58% while the 10-year yield increased +0.06% to 4.16%. 

The US stock futures edged higher through the Asian and London trading sessions on Tuesday with the S&P 500 futures up +0.28% when the New York session began. The release of the US CPI number was met with a whipsaw with the S&P 500 futures falling as low as 5176.25 (-0.30%) and bouncing +0.86% from the lows to 5221 before easing to 5206 by the time the New York trading session began.

The US stock market opened higher from Monday. It was then met with a fall in prices in the first half an hour of opening. However, stock prices then clawed its way higher through the New York session possibly due to increased risk taking after the release of the US CPI data.  As a result, the S&P 500 rose +1.21% (high: +1.12%, low: -0.07%), the Dow Jones increased +0.61% higher (high: +0.78%, low: -0.15%) while the Nasdaq climbed +1.49% (high: +1.54%, low: -0.18%).

The crypto market saw some weakness yesterday with Bitcoin seeing a flash crash down to the 68,240 level (-6.0% from the highs), triggering liquidations of $360 million of leveraged derivatives positions across all digital assets. While Bitcoin did see a bounce back to the 71,000 level, the recovery in Ether and some other altcoins was less pronounced with Ether down -2.13% on the day.
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Headlines & Market Impact

Fed to start rate cuts in June; risk fewer delivered this year: Reuters poll

Notable Snippet: The U.S. Federal Reserve will cut its key interest rate in June, according to a stronger majority of economists in the latest Reuters poll, as the central bank waits for more data to confirm whether inflation is headed convincingly toward its 2% target.

The survey also showed respondents saw it more likely that if Fed policymakers change their rate projections at the March 19-20 meeting the median view would signal fewer cuts this year, not more.

In his latest testimony to the Congress, Fed Chair Jerome Powell reiterated policy easing would likely be “appropriate” at some point this year. But still-sticky inflation and a very resilient labour market could prevent an early rate cut.

After a brief period of betting the first cut would come in March, and then shifting bets to May, financial market traders are more in line with comments from Fed officials, with rate futures also now priced for a first rate reduction in June.

Unlike pricing in markets, most economists in Reuters surveys since September have been consistently forecasting a cut around the middle of 2024 and have grown even more convinced in the latest survey.

While all 108 economists in the latest Reuters March 5-11 poll predicted the fed funds rate to stay in a 5.25%-5.50% range next week, a two-thirds majority, 72, said the first rate cut would come in June, compared to just over half in February.

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Intel survived bid to halt millions in sales to China’s Huawei, sources say

Notable Snippet: The push came from Intel rival Advanced Micro Devices, which argued it was unfair that it did not receive a licence to sell similar chips to Huawei and from China hawks, who are seeking to stop all sales to the Chinese firm.

Intel’s ability to hang on to a licence to sell chips while a rival could not obtain similar permission demonstrates the uneven and uncertain terrain companies face as the U.S. seeks to limit Beijing’s access to sophisticated American technology, especially to a heavily sanctioned company like Huawei.

It has also allowed Huawei to keep a small but growing share of the global laptop market, while AMD was deprived of hundreds of millions of dollars’ worth of sales to the Chinese sanctioned firm, data showed.

Republican Senator Marco Rubio called on the Biden administration to revoke Intel’s licence to sell to Huawei “immediately” following the Reuters report.

“No American company, especially those receiving taxpayer funding, should be fueling its innovation,” he said, referencing Intel’s expected grant from the Commerce Department to expand its U.S. chip production.

Intel is not the only chipmaker to benefit from the uneven licensing policy. Qualcomm also clinched a licence to sell chips to power Huawei’s smartphones near the end of the Trump administration while Taiwanese rival Mediatek’s application for permission to sell similar chips was denied, sending its Huawei sales plummeting, another source said.

However, Qualcomm said in a recent filing that the company does not expect to receive “material product revenues from Huawei going forward,” since Huawei announced the launch of new 5G phones using its own chips.

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U.S. curbs on China to rise as ‘decoupling is really in full force,’ expert warns, amid possible TikTok ban

Notable Snippet: The U.S. is likely to impose more curbs to check competition from China as “the decoupling is really in full force,” said Steven Okun, founder and CEO of consultancy APAC Advisors.

“The question is to what extent and how broad will it be,” Okun told CNBC’s “Street Signs Asia” on Monday.

Last week, lawmakers voted 50-0 to advance a bill requiring China’s ByteDance to divest TikTok or risk the U.S. banning the popular video app. House Speaker Mike Johnson told reporters the TikTok divestiture bill will be on the floor on Wednesday.

“So long as it is owned by ByteDance and thus required to collaborate with the Chinese Communist Party, TikTok poses critical threats to our national security,” according to a press statement by the Select Committee on the Chinese Communist Party.

“You prevent China from accessing the U.S. market, in particular, where the party can have some type of control, and then you build at home, as opposed to relying on China. So this is just part and parcel from a broader strategy,” he added.

“This is going to apply to EVs. It is going to apply, I think, to the broader renewable sector. It is going to apply to biotech – I think this is the sector you want to watch next.”

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Stock Indices

Phan Vee Leung
CIO & Founder, TrackRecord