The month of March is set to end on a quieter note as banking concerns ease, the dollar stabilizes, and volatility measures subside. Treasury yields are steady ahead of new consumer spending data and an update in the Federal Reserve’s preferred inflation indicator, equity futures are strengthening, and risk-sensitive currencies are edging higher – suggesting that investors could be positioning for a generalized bear market bounce in early April.
Mexico’s peso remains relatively unmoved after the Banxico delivered a widely-expected rate hike and shifted its forward guidance in a firmly data-dependent direction. After telegraphing the intention to do so at last month’s meeting, policymakers lifted the key rate by 25 basis points, pushing the benchmark borrowing cost to 11.25 percent, even as they noted “annual headline inflation has decreased more than expected”. In a significant step, officials also avoided expressing a view on the next meeting, saying they will “take into account the inflation outlook, considering the monetary policy stance already attained”.
The Japanese yen is weaker after Tokyo consumer prices excluding fresh food rose 3.2 percent year over year in March, slowing from February’s 3.3 percent, and the country’s unemployment rate climbed to 2.6 percent – reducing the odds on a decisive exit from easy-money policies at the Bank of Japan. Softness in manufacturing sector employment was particularly evident, suggesting that a global drop in tangible goods demand is beginning to hit home for Japan. Market-implied odds on a removal of the central bank’s yield curve control policy have gradually faded in the last month as inflation pressures have subsided and major export industries have run into headwinds.
Headline inflation in the euro area slowed by more than expected in March, but core price growth hit a record, keeping the European Central Bank on course toward another rate hike in early May. The all-items harmonised consumer price index climbed 6.9 percent year over year, down from 8.5percent in the previous month as energy prices fell 0.9 percent. Core inflation, which excludes energy and food costs, accelerated to 5.7 percent from 5.6 percent in February, suggesting that underlying pressures remain stubbornly strong. The euro is down slightly on the session, but looks set to close out the month with a circa-3-percent gain, supported by a comparatively-more-hawkish monetary policy outlook.
US data out in less than half an hour is expected to show a 0.2 percent monthly gain in personal income supporting a 0.3 percent increase in consumer spending for February, with the core personal consumption expenditures index climbing 0.4 percent as underlying price pressures remain hotter than the Federal Reserve would prefer. In a series of speeches and appearances yesterday, policymakers acknowledged risks emanating from recent turmoil in the banking sector, while hinting that at least one more rate hike would likely be appropriate. The Minneapolis Fed’s Neel Kashkari warned there was “more work to do,” echoing Boston’s Susan Collins, who said “Inflation remains too high, and recent indicators reinforce my view that there is more work to do to bring inflation down to the 2 percent target associated with price stability”. She said she saw the median dot plot estimate in last week’s Statement of Economic Projections – which pointed to another hike – “as reasonably balancing the risk of monetary policy not being restrictive enough to bring inflation down, and the risk that activity slows by more than needed to address elevated price pressures”.
This comes as interest rate futures are putting less than 50-percent odds on another increase at the central bank’s May meeting, with two cuts fully priced in before the end of the year. Early April might bring relatively smooth sailing for markets, but we suspect that at some point, this level of cognitive dissonance will have to crumble.