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Volatility Trends Lower as Global Monetary Tightening Cycle Winds Down

Markets are trading sideways this morning after the latest producer price data brought more evidence of an easing in inflation pressures – and ahead of a retail sales report that could show a decline in overall consumer spending levels. Equity futures are down slightly, with losses concentrated in banks that are expected to report weaker earnings in the coming days. With investors bracing for a final volley of rate hikes from major central banks—and positioning for cuts that seem likely to follow—short-term yields are edging up, but remain stable across the rest of the curve. The dollar is flat against most of its major counterparts, with the Canadian dollar inching higher on supportive technicals and relatively-robust oil prices.

The Bureau of Labor Statistics yesterday reported supplier costs fell in March by the most in almost three years: a development that could foreshadow a steep decline in headline inflation over the coming months. The producer price index fell 0.5 percent between April and March, marking the biggest monthly decline since the pandemic began hitting supply chains in early 2020. Separately, the number of initial claims for unemployment benefits increased by 11,000 to a seasonally-adjusted 239,000 last week, driving moving averages up and indicating a broader easing in (still historically tight) labour markets.

The euro is trading near its highest levels in a year as expected growth differentials move in the economic bloc’s favour, and central bankers warn more aggressive rate hikes are possible. In a series of interviews, policymakers—including Robert Holzmann, Madis Muller, Joachim Nagel, and Bostjan Vasle—presented a united front this week, noting that the economy was performing better than expected, indicating that recent banking turmoil was unlikely to impact the direction of monetary policy, and suggesting that another jumbo-sized move could come at the next European Central Bank’s next meeting. Governing Council member Holzmann said “If things in May haven’t really become more terrible, I think we can afford another 50 basis points, and in particular, if no social agreement emerges to temper inflation we’ll have to do more to produce it.”

Economists think retail sales fell a seasonally-adjusted -0.5 percent in March, following February’s -0.4-percent decline. Although subsiding inflation pressures are helping boost overall sentiment levels, recession fears are growing more prominent for many consumers, and a number of one-off factors—including lower tax refunds and expiring food stamp coverage—could force many pocketbooks closed.

The Chicago Fed’s Austan Goolsbee is scheduled to do a CNBC interview at 8:30, and markets will listen closely for insight into the relative newcomer’s views on inflation and the economy. Governor Christopher Waller will discuss the outlook in a speech at 8:45. Industrial production numbers for March are expected to show a 0.2 percent increase from the prior month, and business inventories for February are seen climbing 0.3 percent from January. Observers think the University of Michigan’s preliminary consumer sentiment index for April will hold steady at the levels recorded in late March, but lagging effects from the collapse of Silicon Valley Bank and other lenders could put downward pressure on the print.

Next week will bring the latest consumer price index numbers for Canada, the Eurozone, the United Kingdom, and Japan, along with a raft of central bank speakers. With very few releases scheduled in the US, Treasury volatility could continue its descent, providing additional lift to rate-sensitive currencies against the dollar.

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Twists & turns

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