Indices up, Gold at 5-year high, encouraging inflation data

Stocks posted gains by lunchtime, reflecting optimism that this morning's economic data eased the need for the Federal Reserve to make another rate hike after an anticipated 0.25% move next month. Inflation and the Federal Reserve remain Wall Street’s primary focus, with traders generally upbeat about what they saw in this morning’s producer price index data, a measure of prices received by producers of goods and services, and a positive forerunner of future consumer inflation. And the Fed indicated caution on rate rises at its last meeting, suggesting a pause.

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Fed deliberations focussed on inflation

The Federal Reserve provided insight into the complex discussions taking place within the board room during its March policy meeting. Several FOMC members considered a pause in rate hikes to provide time to see how tools implemented by the central bank would help to stabilize the troubled banking sector. Ultimately, policymakers decided that the banking industry was strong enough to focus on tackling what they considered to be the greater threat – inflation.

Fed members have made recent comments that they don’t want to make the same mistake that the central bank made in 1980. The Fed felt the pain of its interest rate hikes in early 1980, and it succumbed to pressure to ease that pain by pivoting its policy in March of that year, feeling like it had seen enough turn in inflation to justify the flip in policy. However, inflation took an even stronger foothold when it did so, with consumers rapidly jumping back in to take advantage of the lower rates to increase spending. That necessitated an even stronger push in rates upward toward 22% by late 1980 in order to finally get inflation under control.

In light of past mistakes, policymakers are biased to keeping rates too high too long if necessary to be sure they don’t make the same mistake. Another 25-basis point rate hike is highly likely in May with no cut in rates anticipated for some time as the Fed tries to make sure that inflation is tamed for good, or at least until the next cycle.

Indices up, fear index down

• At the time of writing, the broad S&P 500 index and the tech heavy NASDAQ were up on the inflation data, respectively up by 0.8% and down by 01.6% at 4,126 and 12,118 respectively
• The VIX, Wall Street’s fear index, edged lower to 18.1 reflecting a moderate view of risk
• The dollar index was off by 0.6% 102.9, reflecting optimism on rate hikes, with £/$1.26 and €‎/$1.10
• Yields on 2- and 10-year Treas%uries edged lower to 3.96 and 3.41%

Gold at 5-year high, Oil sees profit taking

• Gold’s was 1.4% higher at $2,054 per ounce, a new 5 year high
• Crude oil prices were 0.9% lower at $82.5 per barrel on profit taking at the top of its recent range
• Grain and oilseed prices were mixed in overnight trade.

Producer inflation slows markedly

• PPI inflation was up just 2.7% year-on-year in March, down from 4.6% the previous month – a major slowdown
• PPI fell 0.5% month-on-month in March, compared to forecasts of no change, after falling 0.1% in February
• Core PPI was up 3.4% year-on-year in March, down from 4.4% last month
• Core PPI, excluding volatile food and energy sectors, fell 0.1% month-on-month in March, compared to an expected 0.3% increase, after being flat in February

Unemployment benefit claims marching higher

• First-time claims for unemployment benefits rose to 239,00 in the week ending April 8, up from 228,000 the previous week and above analyst expectations
• The four-week moving average rose to 240,000 claims

War in Taiwan?

• China is preparing for war against Taiwan, according to Taiwan’s foreign minister Joseph Wu, but it’s hard to say whether this is true or not (although it would undoubtedly rock financial markets and so is worthy of note)
• China is likely to take definitive steps at some point to control Taiwan, and there are certainly signs that the date is much closer now than most thought a few months ago
• Recent developments suggest that China feels that it is being pushed toward action

Russia to end Ukraine grain deal in May

• Russia stated it will not extend the UN-brokered grain deal beyond May 18 unless the West makes significant changes to blocking the export of its grain and fertilizer, according to Reuters
• What does Russia want?: the Russian Agricultural Bank (Rosselkhozbank) to be reconnected to the SWIFT banking system to finance its grain and fertilizer exports
• Sanctions are working and are unlikely to be removed

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com