Markets
It was all about the March US manufacturing ISM yesterday. The ISM unexpectedly returned above the boom/bust-mark (50) for the first time since September 2022! The increase from 47.8 to 50.3 (vs 48.3 expected) came on account of higher production (54.6 from 48.4), rising new orders (51.4 from 49.2), a smaller contraction in inventories (48.2 from 45.3) and rising input prices (55.8 from 52.5; strongest pace since July 22). Manufacturing jobs were cut for a six straight month though at a lesser pace (47.4 from 45.9). The welcome return to growth in manufacturing and accelerating prices strengthen our view that the Fed is unlikely to lower its policy rate ahead of September. A less robust labour market is the key risk as stressed by Fed Chair Powell at the March press conference and repeated by the Fed Chair last Friday. However, even in that scenario we don’t think that Powell will push through such pivotal decision given the current razor-thin majority in favour of a cumulative 75 bps rate cuts this year. Markets followed the hawkish elements in yesterday’s ISM with US Treasuries selling off. A continued rise in oil prices (Brent crude > $88/b) played a role as well with risk sentiment in the US yesterday caught in the Treasury sell-off. US yields added 8.5 bps (2-yr) to 11 bps (10-yr) in a daily perspective. From a technical point of view, both the US 2-yr yield and the 10-yr yield are in a closing triangle pattern. They bounced off support coming from an upward trend line since February last week and both eye the (already tested) YTD high at respectively 4.75% and 4.35%. The jam-packed US eco calendar this week contains several potential triggers to break resistance with a bearish escape out of the triangle pattern. Chronologically we have JOLTS job openings (today), ADP employment, ISM services and a Powell speech (Wednesday) weekly jobless claims (Thursday) and payrolls (Friday). German Bunds open significantly weaker as well this morning (markets closed yesterday for Easter Monday) in response to the Treasury sell-off. We think that the US underperformance will nevertheless continue as EMU inflation data (Germany today; EMU tomorrow) will likely extend the EMU disinflation process, providing the ECB with momentum to conduct a first rate cut in June, ahead of the Fed. For the same reasoning we see EUR/USD drifting further towards the YTD low at 1.0695. A break lower opens the pat for a return to last year’s low at 1.0494. USD/JPY is again closing on the (potentially intervention triggering) 152 handle.
News & Views
The monthly shop price index of the British Retail Consortium showed UK store inflation dropping sharply in March. The Y/Y measure slowed from 2.5% in February to 1.3% in March, the lowest reading since December 2021. Comparted to the previous month, prices declined by 0.4%, with both food (-0.3% M/M ) and non-food prices (-0.4% M/M) contributing to the decline. According to BRC, the decline was driven by fierce competition to bring prices down for costumers. The BRC assesses that while the decline in prices is good news for consumers, “retailers face significant increased cost pressures that could put progress on bringing down inflation at risk”.
The Bank of Canada’s quarterly Business Outlook Survey showed that business sentiment and sales growth expectations have stopped falling. Especially indicators of business conditions, sales outlooks and employment intentions have changed direction after many quarters of decline. Demand remains soft due to high interest rates, but businesses expect interest rates to decline over the next 12 months. Subdued demand allows price pressures and the labour market to ease. Firms are finding it easier to fill job vacancies, but wage growth remains high. Businesses pricing behavior is continuing to normalize. Fewer firms than in the previous survey are planning unusually large or frequent price increases over the next 12months. However, the slow moderation in wage growth and gradual price through of high costs is keeping output price growth elevated. A separate survey on consumers’ inflation expectations shows that inflation has slowed, but their expectations for the near term have barely changed. The share of consumers expecting long-term inflation to be above 5% increased from 37% to 41%.
