Macro Notes
In today's post we dissect March's US CPI report, conduct a post mortem on the ECB's monetary policy meeting and share some thoughts on the Bank of Canada's economic outlook.
US CPI:
Headline and Core readings for the month of March both came in at +0.4%, higher than market expectations of +0.25%. A segment by segment analysis of the number shows continued signs of higher energy prices feeding into headline measures.
Higher energy prices are impacting US CPI through two main channels:
1. higher prices for gasoline/energy commodities (1.1% in March)
2. upward momentum in transportation costs (+1.5% in March)
Apparel is also showing strength at +0.7%, following on from a +0.6% rise in February.
A sharp bounce back in medical care costs was evident in March which came in at +0.6% following a decline in February.
Overall, apart from milder food prices and declines in motor vehicle prices, the March US CPI report showed firm gains across components and provided further evidence that underlying price pressures remain.
The market duly responded to the number by pushing back June Fed rate cut expectations, modestly strengthening the dollar and pushing up bond yields.
Ecb Post Mortem:
Market interest rates over in Europe have moved up less this week relative to the US owing to dovish overtones emanating from today’s ECB meeting.
Some European Governing council members seemed ready to act today and President Lagarde of the ECB sounded confident about the prospect of the current disinflationary process continuing into the coming months.
June now seems the mostly likely focal point for a potential shift to easier monetary policy given it also happens to be a meeting where they publish their new inflation forecasts.
(Note : their current estimate is 2.3% for this year which looks low to us)
By the time June comes around, there should be enough evidence available to determine whether recent global supply disruptions and higher energy prices will indeed bias European inflation higher. As clearly communicated in earlier posts, our view remains that European headline Inflation is susceptible to upside risks going forward owing to ongoing strength in service related inflation (currently running at 4%), dissipating downward pressure from energy related base effects, and rising goods prices owing to elevated shipping costs.
Even if the ECB feels confident enough to deliver its first rate cut at the June meeting, subsequent rate cuts will be few and far between until it becomes clear that inflation has indeed returned back to 2%.
All eyes now on April’s CPI flash estimate set to be released on the 30th of April.
Thoughts on Bank of Canada:
The Bank of Canada’s messaging at its MPR meeting this week was more tentative than the confidence displayed by the ECB. They notably revised down their inflation projections for this year by 20 basis points while at the same time revising up their GDP forecasts by a substantial +0.7%. They remain concerned about inadequate momentum in the labor market in order to absorb new immigrants while still noting that even though inflation has come down, annualized rates remain well above 2%.
The market overall took the inflation downgrade and concerns about labour force absorption to signal a potential policy divergence opening up between the Fed and Bank of Canada.
The resulting widening of interest rate differentials between the US and Canadian fixed income this week have led to a weakening of the Canadian dollar through some key technical levels on the charts.
Conclusion
Whether “Policy Divergence” themes between the US and other developed economies such as Europe and Canada end up becoming a macro-economic reality is yet to be seen. Currently core inflation rates in all 3 economies hover around 3% and have been highly correlated ever since the pandemic. The prospect of US inflation now starting to outstrip other developed economies, while plausible, seems overall unlikely. Time will tell.
As Always we shall keep you posted here at Purity Macro.
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Disclaimer
The information provided in this post is for general use only and does not constitute a solicitation for investment. It should not be construed as professional financial advice. Seek independent professional consultation before making an investment decision.