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The CPI fell 0.3 percent in March. While a drop in energy was expected, core inflation fell 0.1 percent following a 7.0 percent drop in wireless telephone services and resumed weakness in core goods.

Energy Weighs on Headline, While Food Inflation Offers Respite

Consumer prices fell in March for the first time in more than a year. The CPI declined 0.3 percent versus expectations that price levels would remain flat. The drop last month brought the year-over-year pace down to 2.4 percent, which is still up meaningfully from the 0.9 percent pace registered this time last year.

A drop in gasoline prices was the biggest contributor to the headline's decline. Since, historically, gasoline prices rise in March (the last time they fell was in 2001), last month's 1.1 percent increase translated to a seasonally adjusted decline of 6.2 percent. The cost of energy services, including electricity and utility gas services also declined in March.

Excluding energy, prices slipped 0.1 percent despite a rebound in food prices. Prices for food rose 0.3 percent last month, the strongest monthly gain since mid-2014. The recovery in food prices has been driven by a turnaround in food at home, which after falling for nearly every month since late 2015, have increased at a 2.8 percent annualized pace the past three months.

Drop in Core CPI: Talk Is Cheap

Also contributing to the soft March reading was a 0.1 percent drop in the core index, the first monthly decline in more than six years. A 7.0 percent decline in the cost of wireless telephone services alone shaved off 0.1 percentage point from the headline's reading and led to a 0.1 percent decline in core services inflation last month. Shelter inflation also eased up a bit, increasing less than 0.2 percent for the first time in nearly three years. The slowdown stemmed from a drop in the relatively volatile lodging away from home component (down 2.4 percent last month), but also an easing in owners' equivalent rent growth, which increased only 0.2 percent. Medical care services also slowed, rising 0.1 percent.

As we have previously written, the recent gains in core goods inflation looked unlikely to be sustained given what seemed to be some difficulty with seasonal adjustment at the start of the year. Core goods prices fell 0.3 percent in March, in part due to a 0.7 percent decline in apparel prices which look to be payback for strong gains at the start of the year. That said, new and used vehicle prices also fell last month and are likely to remain a source of weakness given the glut of vehicles coming off lease this year.

We suspect that the weakness in today's core CPI print is not the start of a new trend given the curiously large drop in wireless services and some payback in the core goods component. Although the core index slipped to 2.0 percent year-over-year, we believe the Fed will look past this month's weakness and continue to focus on the core PCE, which continues to drift higher.

The moderate pace of inventory building continued in February, with businesses boosting stocks 0.3 percent. Sales are proceeding at a similar clip, keeping the inventory-to-sales ratio steady.

Steady as She Goes

Business inventories rose 0.3 percent for a third straight month in February, with manufacturers, retailers and wholesalers all adding to stocks.

The inventory build looks warranted given the steady pace of sales at manufacturers and wholesalers. Retailers saw sales slip in February, but core sales looked to have rebounded in March according to a separate report released this morning.

Inventories Better Aligned with Sales

The inventory-to-sales ratio was unchanged in February at 1.35, but has improved markedly over the past year, even when adjusting for inflation effects.

Although inventories have been rising in line with their recent trend, rising inflation in the business sector suggests that real inventory growth is likely to have slowed in the first quarter and will likely be a drag on Q1 GDP.

In the midst of bank holiday, the currencies are waiting for US data today. The USD/JPY, popular "Ninja" is in downtrend and it is targeting 108.35. If we see a retracement towards 109.30-45 POC, (W L5, D H4, 61.8, Order block, Historical sellers, EMA89) now moment sellers could wait and price should reject the price towards 108.72. If we don't see any retracement to the upside, a momentum break of 108.70 could tank the price lower to ATR/L5 projection 108.35.

Notes/Observations

• Geo-political concerns of potential expanded US involvement in regional hot spots (Korea, Mid-East)
• Focus centered on North Korea as it approaches the key Apr 15th birthday of its founder Kim Il-sung for potential nuclear test
• Market participation non-existent in wake of holidays in Far East, Europe and US

Overnight:

Asia:

• PBoC resumed its open market operations for the 1st time in 13 sessions and injected CNY110B combined in 7, 14, and 28-day reverse repos

Europe:

• France IFOP daily presidential poll: Second round poll: Macron 58.5, Le Pen 41.5% (unchanged)

Americas:

• Canadian Government: introduces legislation to legalize recreational Marijuana; intends to provide regulated, restricted access to Cannabis no later than July 2018

Energy:

• Weekly Baker Hughes US Rig Count: 847 v 839 w/w (+1%)(13th straight weekly rise)

Economic Data

• (CN) China Mar M2 Money Suppy Y/Y: 10.6% v 11.1%e; M1 Money Supply Y/Y: 18.8% v 19.3%e, M0 Money Supply Y/Y: 6.1% v 4.0%e
• (CN) China Mar New Yuan Loans (CNY): 1.020T v 1.200Te
• (CN) China Mar Aggregate Financing (CNY): 2.120T v 1.50Te

Fixed Income Issuance:

• None seen

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

• Closed for Good Friday holiday

Speakers

• Italy said to be considering a deficit higher than the 1.2% of GDP forecasted in its 2018 budget draft
• Bank of Japan (BOJ) said to be offering a more upbeat view of economy and exports

Currencies

• FX markets were at a standstill with most of Europe closed for Good Friday holiday. The USD still unable to shrugged off recent comments from President Trump on his concern of a too strong of a greenback.
• USD/JPY hovered near its recent 5-month low and again tested its 200-day moving average. The pair holding below the 109 level. The 200-day MA has not be breeched since Trump won the US election back in early Nov.

Looking Ahead

• 07:00 (IL) Israel Mar CPI M/M: 0.1%e v 0.0% prior; Y/Y: 0.7%e v 0.4% prior
• 07:30 (IN) India Weekly Forex Reserves
• 08:00 (PL) Poland Mar M3 Money Supply M/M: 0.8%e v 0.3% prior; Y/Y: 8.6%e v 8.2% prior
• 08:30 (US) Mar CPI M/M: 0.0%e v 0.1% prior; Y/Y: 2.6%e v 2.7% prior
• 08:30 (US) CPI Ex Food and Energy M/M: 0.2%e v 0.2% prior; Y/Y: 2.3%e v 2.2% prior
• 08:30 (US) Mar CPI Index NSA: 244.237e v 243.603 prior; CPI Core Index SA: 251.651e v 251.299 prior
• 08:30 (US) Mar Advance Retail Sales M/M: -0.2%e v +0.1% prior; Retail Sales Ex Auto M/M: 0.1%e v 0.2% prior, Retail Sales Ex Auto and Gas: 0.3%e v 0.2% prior, Retail Sales Control Group: 0.3%e v 0.1% prior
• 08:30 (US) Mar Real Avg Weekly Earnings M/M: No est v -0.3% prior; Real Avg Hourly Earnings Y/Y: No est v 0.0% prior
• 10:00 (US) Feb Business Inventories: 0.3%e v 0.3% prior
• (LU) Luxembourg Sovereign Debt to be rated by Fitch

Weekend

• Sunday (TR) Turkey holds referendum on presidential system

"The U.S. dollar still rules as the most important currency in the world's markets, which has in recent history created an inverse relationship between gold and the greenback."

– Dani Burger and Julie Verhage, Bloomberg

Pair's Outlook

On Friday morning the yellow metal's price remained unchanged, as it was not traded due to Easter Holidays. However market participants have the information of the later hours of Thursday to analyze. The bullion initially declined as a consolidation occurred on Thursday. However, the metal managed to regain strength and even score gains by the end of the day, as the day's trading ended at the 1,288.40 level. Gold was stopped on its way to the 1,300 level, which is most likely going to be reached after the holidays.

Traders' sentiment

Trader positions have not changed and remain 53% bearish. Meanwhile, 56% of trader set up orders are to buy the metal.

"We hope the BoJ uses the upcoming meeting as an opportunity to remove this confusion, a factor that should help to stabilise the ¥. We remain neutral until then."

– Westpac (based on FXStreet)

Pair's Outlook

Rather mixed fundamental data on Thursday caused the US Dollar not only to avoid losses, but also to refrain from posting any substantial gains. As a result, the USD/JPY currency pair provided the descending channel's support line with an additional confirmation, indicating that price might soon rebound and begin its journey towards the 112.00 level. Although daily technical indicators are unable to confirm a recovery, the longer timeframe ones can. Moreover, the 200-day SMA is bolstering the channel's lower border, which should be sufficient for the Buck to bounce back from the 109.00 mark. In case the given support area fails to hold, risks of plunging towards 105.00 would arise.

Traders' sentiment

Nearly three quarters (73%) of all open positions are now long. At the same time, the number of buy orders edged up from 56 to 61%.

"In view rising geopolitical risk and Brexit uncertainties, we expect limited upside potential in GBPUSD this week."

– BMO Capital Markets (based on PoundSterlingLive

Pair's Outlook

On Thursday, the British currency suffered a relatively serious loss against the US Dollar, having almost completely erased Wednesday's gains. Nevertheless, this decline prolonged the bearish trend-line, while the immediate support, namely the weekly R1, managed to prevent the Cable from falling deeper, thus, causing trade to close above 1.25. No significant development is expected today, mostly due to Easter holidays. However, technical studies keep giving bullish signals, suggesting another leg up is possible. The down-trend is likely to keep the Sterling at bay, but another bearish development would somewhat confirm the Cable's short-term consolidation trend.

Traders' sentiment

Today 56% of traders are long the Pound (previously 54%), while 52% of all pending orders are to sell the Sterling, down from 55% yesterday.

"I think our dollar is getting too strong, and partially that's my fault because people have confidence in me."

– Donald Trump (based on Bloomberg)

Pair's Outlook

During the early hours of Friday's trading session the common European currency traded near the 1.06 level against the US Dollar, and the pair was positioned for a decline during the day's trading. The rate had almost erased all the gains of Wednesday, as it fell below the combined support of the 100-day SMA at 1.0626 and the weekly PP at the 1.0621 mark. These levels of significance on Friday were providing resistance, which the pair had failed to break. Due to that reason it is possible that the currency exchange rate will after all decline to the weekly S1, which is located at the 1.0552 level. However, it might stop at the long term channel's lower trend line near 1.0585 level.

Traders' sentiment

SWFX traders remain neutral bullish, as 52% of open positions are long. Meanwhile, 52% of set up orders are to sell the Euro.

The pair ended Asian trading in red after threading water for the most of the session. Bias remain bearish, keeping key supports at 108.77/70 (200SMA/Thursday's low) under pressure. Firm break here would trigger fresh acceleration towards 107.84 (Fibo 61.8% of 101.17/118.65 rally). Bearish studies maintain pressure, with thick hourly cloud (spanned between 109.12/71) heavily weighing on near-term action and guarding upper pivot at 110.00 zone (former base/daily Tenkan-sen). Extended holiday weekend suggests the pair would remain range-bound, however, geopolitical tensions and release of US CPI and Retail Sales data may affect the pair during thin-volumes holiday trading.

Res: 109.12; 109.71; 110.00; 110.76

Sup: 108.77; 108.70; 108.53; 107.84

USD/CAD has edged lower in the Friday session, as the pair trades slightly above the 1.33 line. Canadian banks and stock markets are closed for Good Friday and there are no Canadian events on the schedule. We're likely to see thin trading in the currency markets as we wrap up the trading week. In the US, it's a busy day, with the release of CPI and Retail Sales reports. CPI is expected to tread water at 0.0%, while the forecast for retail sales stands at 0.2%. We'll also get a look at the Treasury Currency Report, which details currency practices of the United States's major trading partners. Earlier this week, President Trump said that China was not guilty of currency manipulation, contradicting what he had repeatedly declared on the campaign trail.

As expected, the BoC held rates at 0.50% on Wednesday. Following the rate decision, BoC Governor Stephen Poloz sounded a bit more hawkish than in previous statements, saying that the central bank was "decidedly neutral" regarding monetary policy. The BoC raised its growth forecast for 2017, as employment numbers have improved in recent months. The markets are not expecting the BoC to raise rates in 2017, but further rate hikes from the Federal Reserve could complicate things, as wider divergence between interest rates in Canada and the US could hurt the Canadian dollar and put pressure on the BoC to respond by raising rates.

US consumer behavior has been perplexing, displaying a "hard/soft discrepancy" with regard to consumer indicators. Consumer confidence levels have failed to translate into stronger consumer spending, a key driver of economic growth. Confidence levels are considered "soft" data, compared to actual spending numbers, which are termed "hard" data. Will this pattern continue in the March releases? On Thursday, UoM Consumer Sentiment improved to 98.0, beating expectations and hitting a 3-month high. However, the markets are expecting retail sales reports, the primary gauges of consumer spending, to remain at weak levels. Core Retail Sales and Retail Sales are expected to remain unchanged in March, with gains of 0.2% and 0.1%, respectively. On the business front, surveys are pointing to a similar trend, with weak orders despite high confidence levels. The Fed will be closely monitoring consumer spending reports, and if these numbers remain soft, it's unlikely that the Federal Reserve will press that trigger more than two more times in 2017.