US Inflation Data
Equity markets soften as investors avoided risk after the IMF downgraded its global growth forecasts. Crude oil fell on the lower growth outlook and Russian voicing approval with the current level of oil prices. The USD weakened as treasuries yields fell, with safe-haven demand boosting JPY and lesser extent CHF. FX Volatility has vanished or gets pushed to a dark corner of the liquid EM universe. Overall, we see price action as a reaction to the lack of real drivers ahead of today business schedule. The highlight will be the EU response to the UK request for another Brexit extension and ECB policy meeting. Markets expect the extension to be granted which should be GBP positive. From the ECB we could get some discussion on TLTRO and reserve tiers but nothing groundbreaking.
In the US, the CPI inflation report will bring headline which is expected to hit 0.4% m/m on the back of gasoline prices. However, more importantly for Fed policy, core will read a modest 0.1% sending annual core read down .1% to 2.0%. The trend in core will likely generate expectations for the Fed to keep dovish bias. This should be generally negative for USD but within the macro context unlikely to be game-changer. Finally, the release of the March FOMC Minutes will have investors focused on factors driving US growth and discussion over rate cuts (unlikely). Markets are likely to remain in current markets, as investors are pricing in a tail-like event over micro-tuning forecasts.
Careful markets, yet optimism prevails
Financial markets have to digest many different factors during today’s session. First, the international lending entity IMF slashed global growth for the third consecutive time in six months for 2019, then US President Trump announced it will implement tariffs on $11 billion EU products and finally a Brexit (longer) delay as well as ECB monetary policy meeting are nearing.
Thereupon, the International Monetary Fund global growth outlook drop comes with no much surprise, yet remains weakest since 2009 at 3.30% (January: 3.50%) as risks over deteriorating market sentiment, tighter financial conditions for vulnerable economies as well as EU area spillovers and a hard Brexit are considered. Furthermore, US – China trade discord is discounted, as recent progressions are expected to prompt a rebound in business and investor sentiment. According to IMF scenario, major risks derives from Europe and China among other EM economies, despite a raise in China’s growth of 0.10 percentage points (6.30%). We would however nuance the statement, since the situation in Europe, Asia and EM countries have stabilized. The risk of a no-deal Brexit has sensitively lowered as the EU Commission is expected to offer a flexible, longer delay (e.g. 12 months) at the EU emergency summit session from today, while expectations are turning towards a rebound in China’s economy for 2H 2019 by means of policy stimulus initiated earlier last year. For what concerns the recent announcement made by the Trump administration that it is willing to slap tariffs on EU products (incl. aircraft manufacturing industry), we remain confident that a rapid resolution between both counterparts is feasible.
Currently trading at 1.1272, EUR/USD is heading along 1.1250, as caution will remain the final word during today’s ECB meeting.
