Indices bounce back amidst signs that inflation is sticky

Leading indices bounced back by mid-afternoon, ahead of next week’s Federal Reserve meeting. The VIX, Wall Street’s fear index, fell to the 16 mark, the lowest level seen for almost 2 years and suggesting that traders have few concerns.

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US economic data showed that incomes grew at a bit stronger pace in March, but consumers were a bit more cautious during a tough month focused on bank failures. US economic data reflected stubborn wage inflation, as the Fed’s favorite inflation indicator – the Personal Consumer Expenditure (PCE) – revealed the stickiness of core inflation in March, at a time when energy prices were going lower.

US employment cost data indicated that wage inflation was above expectations in the first quarter, making a stronger argument for the Fed to stick to its plan of at least one more rate hike when it meets next week.

The Fed has repeatedly stated that its primary concern currently is wage inflation, and the consequences of pivoting too soon before it has been brought under control. However, the market still expects a pivot later this year, with the Fed lowering rates a couple of times. That’s contrary to what the Fed has stated at previous meetings, but we’ll see if they remain consistent again next week.

Indices rally, VIX hits new lows

• At the time of writing, the broad S&P 500 and NASDAQ indices were up by 0.6% and 0.4% respectively, at 4,158 and 12,184
• The VIX, Wall Street’s fear index, fell to the 16 mark (the lowest level seen for almost 2 years) – markets appear to be pricing in little risk
• The dollar index was unchanged at 101.6, and major cross rates were also flat
• Yields on 2- and 10-year Treasuries fell again to 4.05% and 3.45%, respectively

Oil higher, Gold unchanged

• Gold prices were again unchanged at the 2,000 per ounce mark
• Crude oil prices bounced back after recent weakness, up 2.7% to $76.7 per barrel
• Grain and oilseed markets struggled to hold overnight gains, with some erratic trade for Kansas City wheat.

Incomes rise, spending restrained, consumer’s inflation moderates

• Personal income rose 0.3% month-on-month in March, exceeding analyst expectations that growth would slow to 0.2% during the period, and matching the previous month
• Personal consumption expenditures were flat month-on-month in March, matching analyst expectations, while the February number was revised to 0.1% growth, down from the 0.2% growth originally reported
• The PCE consumer’s price index rose 0.1% month-on-month in March, matching analyst expectations and down from 0.3% in February, as energy prices fell during the month
• The PCE price index rose 4.2% year-on-year in March, also matching analyst expectations, but the number is down from 5.1% year-on-year inflation the previous month
• Core PCE price index, excluding volatile food and energy sectors, rose 0.3% month-on-month, matching analyst expectations and matching the previous month’s inflation pace
• Core PCE rose 4.6% year-on-year in March, a shade higher than expected, but down from 4.7% the previous month

Employment costs still rising

• The US employment cost index rose 1.2% quarter over quarter in the first quarter, beating analyst estimates of 1.0% growth, while the fourth quarter growth was revised to 1.1%, up from the 1.0% growth originally reported
• Yet, the year-on-year growth for employment costs increased 4.8%, down from 5.1% the previous quarter, because we’re now working with a higher base from a year ago as wages gained upward momentum

Chicago PMI ahead of expectations

• The Chicago PMI came in better than expected for April, albeit still in modest contraction territory, while the
• Updated consumer sentiment data for the Chicago was in consistent with previously reported preliminary data

Chinese holiday will test rebound thesis

• China celebrates its annual Labor Day holiday tomorrow, and is closed through Wednesday of next week
• We have yet to see China’s consumer comfortable enough to increase spending on big ticket items, so holiday spending will be intriguing
• Early indications suggest that China will see record travel during the week: popular sightseeing locations are selling out; the nation’s rail and airline system is expecting record passenger numbers

Poland not ready to admit Ukrainian grain

• Poland reports that an agreement that would allow Ukrainian grain to pass through its country has not yet been completed, with several obstacles yet to overcome
• This comes as more challenges arise for extending the “safe corridor” initiative with Russia for water exports out of three of Ukraine’s ports
• Current perception is that in 2023, demand is poor, but production will be good, leading to excess supply and lower prices
• We’re seeing a modest bounce in grain and oilseed prices following yesterday’s wash-out in prices

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com