Recession worries hit Indices, Oil stronger

Poor retail sales data raised fears of a more significant recession than financial markets have anticipated, erasing enthusiasm over solid bank earnings reports earlier today, and leading to a sell-off in stocks and some commodities. If inflation proves stubborn, with higher oil prices a contributor, the Fed will raise rates in May and will not be cutting anytime soon. This in turn will challenge economic growth and corporate profits.

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Consumer pulls back unlikely to cause a pause in rate hikes

Today’s economic data provides further evidence that the consumer is pulling back spending. Retail sales fell more than expected in March, and the University of Michigan (UoM) consumer sentiment was unchanged. Headline retail sales were down excluding volatile gas and vehicle spending and were also hit by a decline in those categories. The modest improvement in the UoM consumer sentiment index – today's index is roughly 3% below year ago numbers – balances rising numbers for lower-income consumers offset by declining sentiment for higher-income categories.

The Fed still worries that there is too much stimulus left in the system from lower interest rates, triggering a resurgence in consumer spending and therefore inflation; it also knows that resurgent energy prices could further complicate the inflation problem. All of this doesn’t necessarily mean that the Fed will pause rate hikes, but a rate reduction is not likely any time soon.

Oil prices stronger on supply reductions

Spot WTI crude oil futures are trading $19 above last month's low and show no sign of weakening. Earlier this month, OPEC+ announced that it would cut another 1.16 million barrels per day (mppd)  in output next month, bringing total cuts by its members to 3.66 mbpd since November. Some members have already started reducing output, with wells struggling to meet current quotas.

The International Energy Agency increased this year's projected world oil demand growth to 2 mbpd this week, with more than half (57%) of that being increased jet travel due to China opening up. The IEA warned that the OPEC+ cuts could exacerbate the global oil supply deficit. This represents a continuing inflation risk.

China extends its “de-dollarization” campaign

Brazil’s President Lula met with China’s President Xi today in Beijing, after Lula stopped in Shanghai earlier in the week to see the BRICS New Development Bank (NDB) in Shanghai. Xi Jinping has had a parade of world leaders in Beijing over the past month as he seeks to strengthen coalitions with nations that would isolate the United States.

The NDB was set up to facilitate loans, investments, and trade settlements among BRIC member countries – Brazil, Russia, India, China, and South Africa – allowing these member countries to clear transactions without needing to use US dollars through the SWIFT banking system.  Our Shanghai office indicates that Saudi Arabia, Algeria, Iran, and Argentina have applied to join the BRIC economic club. Access to the NDB matters a great deal to Russia, which saw its exclusion from SWIFT as a painful sanction and this new bank as a useful workaround. All of this builds a narrative in which China leads a movement to “de-dollarize” the world economy for financial and political advantage.

Retail sales fell, consumer confidence muted

• Retail sales fell 1.0% month-on-month, above the forecast 0.4% decline, although the February number was revised up from -0.4% to -0.2%
• Retail sales ex vehicles fell 0.8% month-on-month in March, twice the forecast -0.4%, after being flat in February
• UoM’s consumer sentiment index rose to 63.5 in April, ahead of the 62.7 forecast, and up from 62.0 in March
• The current conditions index rose to 68.6, up from 66.3 in March
• The forward-looking consumer expectations index rose to 60.3, up from 59.2 previously

Indices up, fear index down

• At the time of writing, the broad S&P 500 index was off -0.8% at 4,144 while and the tech heavy NASDAQ was off 1.1% at 12,033
• The VIX, Wall Street’s fear index, continued to move lower to 17.7 reflecting a moderating view of risk
• The dollar index was up 0.6% at 101.6, reflecting optimism on rate hikes, with £/$ 1.24 and €‎/$1.10
• Yields on 2- and 10-year Treasuries moved higher again to 4.11% and 3.52%

Gold sees profit taking, Oil strengthens

• Gold’s was off 1.9% higher at $2,016 per ounce
• Crude oil prices were 0.6% higher at $82.7 per barrel
• Grain and oilseed prices were mixed in overnight trade
• Wheat prices led the way higher this morning on renewed concerns about the Ukraine grain initiative ending and drought in parts of the US

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com