The week starts very slowly as most Western markets are closed for Easter holiday. The US revealed the latest core PCE print on a Good Friday and the Federal Reserve (Fed) Chair Jerome Powell spoke after the data. The headline figure came in line with the expectations at 2.8%, down from 2.9% printed a month earlier, the monthly figure came in at 0.3% as expected, but the prior month read was revised up to 0.5%. The bad news – for inflation – is that personal spending jumped more than expected in February, but the good news is – for inflation – personal income fell more rapidly than the expectations. Powell said that ‘the fact that the US economy is growing at such a solid pace, the fact that the labour market is still very, very strong, gives them the chance to just be a little more confident about inflation coming down before they take important steps.’
Of course, as the markets were mostly closed at the time the data came out and Powell spoke, we didn’t see much reaction on Friday. We see slight moves this Monday; the US 2-year yield is down to 4.60% at the time of writing, the 10-year yield hovers around 4.20% and the dollar index is steady near a 1.5 month high. Attention will shift to the US jobs data this week. Hopefully for the Fed, the data won’t be too strong to spoil the Fed cut expectations.
The EURUSD kicks off the week under pressure. The yen bulls are nowhere to be found, but the Nikkei index is sharply sold after the Bank of Japan’s (BoJ) Tankan index fell in the Q1 for the first time in a year. The large manufacturers see their business conditions deteriorate moving forward. Still there has been a notable improvement for manufacturers of petroleum and coal in Q1 thanks to recovery in oil prices. The US crude is up by nearly 20% since the beginning of the year on the back of tense geopolitical environment in the Middle East, a restrictive stance from OPEC when it comes to the supply cuts and robust demand expectations due to the lower interest rate bets from the major central banks. For now, the Chinese stimulus measures and an eventual Chinese recovery were not significantly priced in but China represents an important upside risk. The latest Chinese PMI numbers released during the weekend were encouraging. Both the manufacturing and the non-manufacturing PMI showed a faster-than-expected expansion in March. Especially, the non-manufacturing PMI jumped to 53 – the highest since last summer. Still, input prices fell for the first time since last summer on lower material prices to stimulate demand and the property crisis gave no signs of abating, meaning that the enthusiasm regarding the Chinese data should be taken with a pinch of salt. But the weekend data has a positive impact on oil prices on this slow Monday morning, which sees the barrel of oil trading at the highest level since the year started. OPEC meets this week and is expected to make no changes to its supply cut strategy. The cartel is set to extend supply cuts until the end of this quarter. The IEA expects supply deficit in 2024, while they were looking for a supply surplus in their prediction earlier this year. As a result, the upside risks in oil markets prevail and the positive factors should encourage a further rise of US crude to $85pb per barrel.
In equities, the first quarter ended last week with the S&P500 recording its best performance since 2019. The index gained more than 10% in the first three months of the year even though the Fed rate cut expectations went from six cuts for this year with the first that was supposed to happen in March, to only three cuts with the first rate cut supposed to come on June with a bit less than 70% probability attached to it according to the activity on Fed funds futures.
In Turkey, municipal elections of Sunday ended in tears for Erdogan-backed AKP leaders in major cities including Istanbul. Even though the news hint at a potential change – for better – in the future, we won’t see a meaningful change in the immediate aftermath of the municipal elections. The monetary policy will remain unchanged and the USDTRY – which is trading higher in the wake of the latest elections – should continue trending higher at a potentially higher speed as the central bank may put less effort to counter the lira’s depreciation now that the elections are behind.
