Indices flat, Gold strong, rate hikes baked in, fear index hits new lows

Equity indices were flat, but surprisingly the VIX ‘fear index’ fell below 17 to trade at its lowest level in 15 months. A quarter point rate rise in May is baked into market expectations (which might be optimistic). Earnings disappointed today: Goldman Sachs earnings fell short, Johnson and Johnson cautioned investors. Today’s Chinese GDP numbers raised optimism for its economy, with positive implications for the global economy.

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Fed rate hike baked into market expectations …

All eyes are on a May rate hike. Much market optimism rests on recent economic data showing a cooling of inflation in March. Fed fund futures now put almost certain 87% odds of another 25-basis-point rate hike at the Federal Reserve's next policy meeting on May 2-3. Wall Street assumes that the hike, which will push the Fed's benchmark rate to the 5.0 - 5.25% range, will represent its "peak rate." It then expects the Fed to pull the rate back down to 4.5 - 4.75% by its December meeting.

But is this view correct?

Will this rate rise be enough and will it signal peak rates? If the risk remains high enough we do not expect the Fed to cut rates later this year, based on the fact that it continues to say that it doesn't want to make the same mistake it did in 1980 by pivoting too soon. Influential St. Louis Fed President James Bullard said today that, due to the strong labor market, he sees more rate hikes coming this year with minimal risks for a recession in the foreseeable future. He is one member of the Fed that believes that rates have to go higher to tame wage inflation, and that doesn't even address commodity risk.

Contemporary data points to persistent inflationary pressures

The Cleveland Fed’s inflation nowcaster index calls for the April CPI to be up 0.59% month-on-month when it is reported next month, above market expectations and likely to spook the Fed if true. Daily “nowcasts” are inflation estimates for two popular price indexes: the price index for personal consumption expenditures (PCE), and the consumer price index (CPI). While it’s too early to say with confidence, there is increased risk of seeing more strength in commodity prices and the labor market in the weeks ahead that could add to the inflation problem that might generate more rate hikes at future meetings.

Resilient housing data despite rates rise

• US housing starts came in at an annualized rate of 1.42 million units in March, ahead of the 1.40 million analyst’s expected
• February number was revised to 1.432 million, down from the 1.450 million originally reported
• Permits for new homes fell to an annualized rate of 1.41 million, down from analyst expectations of 1.44 million
• February was revised to 1.55 million permits, up from the 1.524 million originally reported

VIX trends lower, equities flat

• The VIX, Wall Street’s fear index, fell to another 15-month low of 16.8
• At the time of writing, the broad S&P 500 index was flat at 4,150 and the tech heavy NASDAQ was off by 0.2% at 12,134
• The dollar index was down 0.3% at 101.5, with major cross rates at £/$1.24 and €‎/$1.10
• Yields on 2- and 10-year Treasuries moved up again to 4.23% and 3.58%, respectively

Gold and Oil stronger

• Gold was 0.7% lower at $2,020 per ounce, maintaining strength above $2,000
• Crude oil was 0.6% higher at $81.3
• Corn and soybean prices have also seen consolidation following recent gains
• Kansas City wheat led the way lower after buying dried up near major chart resistance near $9, dragging the rest of the wheats lower as well

Ukraine grain deal at threat (again)

• Ukraine reports indicate that the Black Sea grain deal is under the threat of halting
• Russian officials again blocked inspection of ships moving through the safe corridor as part of the Ukraine grain initiative for the second time in as many weeks
• This action is partially offset by reports that Ukraine reached a deal to allow grain movement through Poland

China’s GDP beats expectations

• China’s first quarter gross domestic product grew 2.2% from the previous quarter and 4.5% year-on-year in the first quarter of this year, beating analyst expectations of 4% growth
• China’s GDP grew 2.9% in the fourth quarter of 2022
• Domestic consumption (40% of GDP) rose 5.8% year-on-year
• Investment (37% of GDP) was up by 5.1% year-on-year
• Exports (20% of GDP) rose by 8.4% in the first quarter, a strong reading
• Areas of concern remain for China’s domestic economy, particularly in retail sales for higher-value goods, autos, appliances and in the property sector

Analysis by Arlan Suderman, Chief Commodities Economist

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