US equity investors jumped on an emotional roller-coaster following the release of the inflation data in the US yesterday. The data came in at 8.5% for March, in line with expectations. This was the highest jump since 1981, and the straight 13th month read above the Federal Reserve’s (Fed) 2% policy target.
Yet, the core inflation, which filters out the impact of volatile food and energy prices, came in at lowest since September, giving some hope to investors that inflation may soon hit a high and start easing, hence get the Fed to move less hurriedly for raising the interest rates. Perhaps a wishful thinking that helped the US equities gap higher at the open, but couldn’t cement gains as all three major US indices ended the session in the negative.
US equity futures are in the positive at the time of writing, hinting at a minor rebound at today’s session, but the high energy prices, the pandemic and the war, combined with the Fed’s tied hands can’t do much to boost the investor mood. Only hope is earnings, but…
…the expectations for the bank earnings are soft this quarter. The net income for the six biggest American banks is expected to fall about 35% from a year ago, also including the major deceleration in activity in March due to the war in Ukraine and the loss due to exiting operations in Russia.
JP Morgan will announce its Q1 earnings today, and the CEO Dimon warned that the bank could lose about $1 billion on its Russia exposure. JP Morgan has been trading lower since last October despite the hawkish shift in Fed expectations. Worries that the economic slowdown could result in lower trading activity, and lower loan growth, and jeopardize the gains from higher interest margins weigh on the sector.
Banks, listed among the favourite reflation trades, haven’t proved to be resilient to the rising yields.
US’ gas tweak
Because gas prices drive more than the half of the monthly rise in inflation, US government is also rolling up its sleeves to ease the pressure at the pump. The US announced yesterday that it will allow the sale of gas with higher ethanol content – which sells with some 15% discount compared with the regular gas, to reduce the US dependence on foreign gas. But first, they need to change the anti-pollution rules as the gas with ethanol is dirtier. It looks like the worry of inflation is worse than the worry for climate change.
Crude oil made a sharp U-turn yesterday, and rebounded more than 6% as the dip-buyers piled in after the price of a barrel slipped below the $93 mark earlier this week and consolidates near the $100pb level at the time I am talking. The fact that Putin wants to continue the war in Ukraine is pointed as the major reason behind the sharp rebound. The recent rebound in oil prices come as a confirmation that the latest relief was nothing more than a temporary correction and the overall trend remains comfortably positive.
One’s misfortune is other’s happiness
But one country’s misfortune is another country’s happiness. The rally in oil prices help Russia reach a record surplus in its current account, along with the fact that the sanctions weighed on imports and triggered circa 270% capital outflows compared to a year ago.
The Institute of International Finance projects that Russia will post a record $250 billion this year, which could make up for a major part of the central bank reserves that have been frozen by the Western sanctions. It doesn’t mean that the Russian economy will do fine, as the living standards will be deteriorating heavily for households, but the regular and resilient money inflow from oil and gas sales will continue financing the war in Ukraine. So, the European ban on Russian coal, which represents about less than 5% of the money paid to Russia, won’t do much unless Europe takes the difficult step to ban oil and gas imports from Russia. For now, the EU prefers sending arms.