Markets trim Fed rate cut expectations amid high US CPI

In focus today

Today's focus will be the ECB meeting where we expect no change in the policy rate. We anticipate that the primary insight from the meeting will be a confirmation of the current ECB narrative, thereby indicating that the ECB is on track to deliver a rate cut in June. While this meeting may be considered an interim meeting and lead to limited market reaction, we expect ECB to deliver a clear commitment for a June rate cut, in the form of an explicit guidance of an 'intention to cut by 25bp in June'. No guidance will be offered beyond that point on the pace of rate cuts or the end level of the tightening cycle. We still like our baseline scenario of three cuts of 25bp this year, but see risks skewed for ECB delivering less than that this year, due to the sticky underlying inflation. See more in ECB Preview - an intention to cut, 5 April.

From the US, March PPI is due for release in the afternoon. The March CPI print surprised to the upside yesterday at 0.4% m/m for both headline and core. We will also get jobless claims which could shed some light on the tightness of the labour market.

In Sweden, we get the monthly Prospera at 8.00 CET. The survey should confirm that inflation expectations are anchored close to 2.0% on all horizons and as such welcome input to the Riksbank, whose vice governor Per Jansson gives a speech about the economy and current monetary policy at 13.15 CET.

Economic and market news

What happened overnight

Asian equity markets tumbled overnight following the CPI print from the US, with the Nikkei down 0.8% and the broad MSCI index for Asia-Pacific (excl. Japan) losing 0.7% as of this morning.

March CPI for China showed that inflation slowed more than expected to 0.1% y/y (cons: 0.4%). Part of the decline is driven by base effects as the effects of the Chinese New Year fall out. The PPI showed a 2.8% decline in prices for March, with large manufacturing capacity weighing on prices.

What happened yesterday

Yesterday's big market driver was the US March CPI print which surprised to the upside as headline printed at 0.4% m/m (cons: 0.3%) and core at 0.4% (cons: 0.3%). Especially worrying for the hopes of a Fed rate cut was the fact that broader core services drove the upside surprise (services ex. shelter at 0.8% m/m), which rhymes well with recent signs of continuing strong wage inflation and a tight labour market. Underlying price pressures not only remain too high for comfort, but also show signs of accelerating in early 2024. The market reaction was strong, as markets scaled back expectations of rate cuts to 2 this year, the 10Y yield gained 18bp, while the greenback gained 1% on most G-10 currencies, including the yen where USD/JPY surged past resistance level 152, raising the risk of a Japanese FX intervention. There was also a spill-over to euro area yields with the 10Y bund up 6bp as of last night.

Equities: Global equities were lower yesterday as US markets was beaten down after a hotter-than-expected CPI report. As we have written extensively about recently, the current situation looks very much like the dynamics and rotation we saw back in Q3 last year when inflation and central bank fear also dominated markets. In US yesterday, Dow -1.1%, S&P 500 -1.0%, Nasdaq -0.8% and Russell 2000 -2.5%. Asian markets are lower this morning following the negative session on Wall Streat. Futures in Europe and US are mixed this morning.

FI: Yesterday's trading session was mostly a waiting game ahead of the US CPI and today's ECB meeting. Yields declined marginally in the morning session, albeit that quickly reversed on the stronger than anticipated US CPI. From 10y Bunds went from being down 2bp on the day to shifting 8bp higher, to end the day at 2.43%. The catalyst was clearly US led with 2y UST rising 22bp on the day to just shy of 5%.

FX: Yesterday's session was characterized by a stronger USD following the higher-than-expected US March CPI print. EUR/USD declined to 1.0750. USD/JPY is hovering around 153, and intervention risk is yet again a market theme. EUR/SEK increased to around 11.50, while EUR/NOK rose above 11.60.