Amidst a backdrop of global economic uncertainties and shifting monetary policies, Wednesday saw US stocks grappling with a challenging rebound effort, struggling to shake off the turbulent start to the second quarter. Heightened concerns surrounding the Federal Reserve's less dovish stance on potential interest rate cuts added to the market's prevailing unease.

Despite concerted attempts to regain ground, market performance remained largely flat at the close. This tepid response may be interpreted as a mixed outcome, suggesting both resilience in the face of adversity and lingering apprehension among investors.

Still, the ongoing pressure from higher interest rates keeps investors grounded. This was further exacerbated by the release of ADP data on Wednesday, which showed that private payrolls grew more than anticipated in March. This unexpected strength in the job market added to concerns among investors about the trajectory of the Federal Reserve's interest rate cuts.

The ADP report released on Wednesday revealed that US private sector employers added 184,000 jobs in March, surpassing expectations by a significant margin. This unexpected strength in job growth suggests that the US labour market remains robust, serving as a red flag preview ahead of Friday's Nonfarm Payrolls (NFP) report.

The rate of pay growth for Americans switching jobs in March reached 10%, marking a significant increase. This metric, often considered as the reward for quitting one job and moving to another, hasn't been this high since June. The double-digit pay growth for job changers, juxtaposed with 5% increases for those maintaining their current roles, is indeed concerning. This discrepancy suggests a dynamic labour market where employees switching jobs are able to negotiate significantly higher wages compared to those staying put. If the US economy is experiencing another labour market churn, it will dampen the need for the Fed to cut interest rates.

Folks don’t trade the ADP pay growth number as it is relatively new, and there is not enough backtest data. But if the update is even close to being directionally accurate, it’s concerning, especially for those wedded to a June rate cut.

Mercifully, for a market needing a major offset, especially before the walls come tumbling down, the recent ISM services release for March, showing a four-year low in the prices paid index at 53.4, provides a welcome relief for the market amid a string of data beats. This decline in the prices paid index indicates that businesses in the services sector are not passing on increased costs to consumers through higher prices despite robust labour market conditions and potential wage pressures.

This development offers some reassurance to market participants concerned about the possibility of a wage-price spiral, where rising wages lead to higher consumer prices, fueling inflation further. The absence of significant pass-through of increased consumer costs suggests that inflationary pressures may remain contained in the near term.

But Federal Reserve officials did not rejoice, dampening expectations for imminent rate cuts. In a CNBC interview on Wednesday morning, Atlanta Fed President Raphael Bostic suggested that he foresees only one rate cut this year, potentially occurring in the fourth quarter. Fed Chair Jerome Powell echoed this sentiment later in the day, emphasizing that the central bank requires more evidence of easing inflation before considering a reduction in borrowing costs.

The 10-year US break-even rate, a key gauge measuring the difference between nominal and inflation-protected Treasury yields, has surged to around 2.35-37%, hovering close to its year-to-date, reflecting heightened inflation expectations among investors.

The recent uptick is driven by the ongoing rebound in commodity prices, especially oil prices, where geopolitical tensions between Israel and Iran have been the proximate driver.

Brent crude prices have climbed to nearly $90 per barrel, approaching levels not seen since October of the previous year. Tensions escalated after Iran vowed revenge on Israel for an airstrike on its embassy in Syria, resulting in casualties, including Iranian military personnel. Notably, this incident marks the first direct attack on an Iranian diplomatic facility by Israel.

The resurgence in oil prices poses a challenge to the inflation outlook, as it counteracts the disinflationary trend triggered by last year's decline in energy prices. If oil price gains persist, they are likely to mitigate the downward pressure on inflation further in the upcoming months. Consequently, there are growing doubts regarding the extent of rate cuts anticipated from major central banks, including the Federal Reserve, for the remainder of this year.

China now fueling inflation?

The resurgence of China's key manufacturing index into positive territory after six months presents a mixed omen for investors. On one hand, it signals the end of a lengthy manufacturing recession in China, sparking optimism about increased commodity demand from the world's largest consumer of natural resources. This potential uptick in demand could benefit commodity markets and related industries.

However, the rebound in China's manufacturing activity also raises concerns about exporting inflation. As demand for commodities increases, it could put upward pressure on prices globally. This scenario exacerbates the already persistent inflationary backdrop, which has been fueled by various factors such as supply chain disruptions and geopolitical tensions.

A Taiwan tragedy for all

Indeed, we seem to have entered an era characterized by a succession of crises, each with its own inflationary implications, particularly due to their disruptive effects on global supply chains, which are the very backbone of our interconnected economy. Addressing these disruptions through strategies like re-shoring often exacerbates inflation, primarily because  US domestic labour tends to be more costly, a factor that initially drove outsourcing.

Against this backdrop, Taiwan's recent experience of its worst earthquake in a quarter-century—a powerful 7.4-magnitude tremor—takes on added significance. The quake resulted in the collapse of over two dozen buildings, claiming four lives and injuring numerous others. While the full extent of the damage is yet to be determined, this event qualifies as a disaster, coinciding with a time when Taiwan occupies a central role in numerous bullish narratives and geopolitical concerns.

Taiwan's pivotal position in the production of advanced semiconductor chips adds an extra layer of complexity to the situation. These chips are critical components in various sectors, shaping market outcomes, macroeconomic trends, and, in some narratives, even the fate of humanity itself. Given Taiwan's inherent vulnerabilities, the heavy reliance on the island for such crucial technology may indeed appear absurd to some observers.

It's fair to say that Taiwan finds itself in an exceptionally delicate position in general and particularly as a backbone in the global landscape. Whether or not this week's disaster directly affects semiconductor production, it serves as yet another stark reminder: Entrusting the design, development, and manufacturing of the world's most advanced computer chips to a single island in the Circum-Pacific Belt is untenable, especially when that island is a prime target for expansionist leaders.



SPI Asset Management provides forex, commodities, and global indices analysis, in a timely and accurate fashion on major economic trends, technical analysis, and worldwide events that impact different asset classes and investors.

Our publications are for general information purposes only. It is not investment advice or a solicitation to buy or sell securities.

Opinions are the authors — not necessarily SPI Asset Management its officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.

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