Treasuries were flat to cautiously sold on the short-end and capital flew into riskier assets as bank stress further waned on Wednesday.
The US 2-year yield consolidated above the 4% mark, gold retreated to $1955 per ounce this morning, whereas the S&P500 rallied 1.42%, pulled out the 50-DMA offers and closed above the 4000 mark. Nasdaq 100 rallied nearly 2% and entered bull market.
If you look at the equity markets today, you could hardly guess that there is still a bank stress going on underneath, which threatens credit availability and calls for a potential recession.
The falling yields, and more importantly the waning volatility on bonds help keeping the bulls in charge.
But it’s important to remember that sentiment remains fragile after such a shaky month for banks; commercial bank deposits are trending lower, as higher-yielding savings alternatives like treasury bills and money market funds amass decent inflows. That’s not only messing with the broad-based market pricing, but also blurs the central bank expectations.
And more importantly, if attention could finally shift to economic data, and economic data is not ideal, we could see the winds change rapidly direction in sovereign bonds pricing.
And when I talk about unideal economic data, I really think of a sticky inflation – which would require further rate hikes from the Federal Reserve (Fed), and other central banks.
US GDP and EZ CPI in focus
Due today, the US will reveal its latest GDP update. The expectation is that the US economy grew 2.7% in Q4 with a stable GDP price index at around 3.9%.
While higher-than-expected inflation indicator is bad, resilient growth could see a positive market reaction on thinking that… we are almost done with Fed rate hikes, and the economy is at a significantly better place compared to where we thought it would be by now.
If that’s the case, the sovereign yields could continue to trend higher, without necessarily weighing on equity appetite.
A soft data, on the other hand, could further push the Fed hawks away, and boost equity appetite on softening Fed expectations.
But building long positions expecting recession is not the best strategy in the medium run.
In the Eurozone, March CPI data that will be coming in from this morning till Friday. And what makes the March numbers so special is that, from March, consumer prices of today will be compared only to the war months.
The latter is expected to have a significant cooling effect on the inflation data.
The EZ inflation is expected to ease from 8.5% to 7.1% in March. BUT core inflation, which filters out energy and food prices, is expected to trend higher. The latter would keep the European Central Bank (ECB) hawks ready for a further rise toward 1.10 against the greenback.
In energy, tensions in Kurdish region of Iraq which leads to a 500’000 barrel decline in supply and the surprise 7.5-mio barrel decline in US crude inventories last week helped pushing the price of American crude to $74 per ounce. We are now back to the levels before the Silicon Valley Bank (SVB) collapse.
Yet, because the bank stress is not over just yet, and the impact on the real economy is yet to be seen, we could encounter a decent resistance into the $75/77 range, which shelter the 50 and 100-DMA.
