US equities extended a rally on Thursday, driven by technology shares despite Federal Reserve officials expressing their view that further tightening is required to tame inflation
United States
The S&P500 rose 0.57% overnight along with the Dow Jones 0.43% and Nasdaq Composite 0.73% while the economically sensitive Russell 2000 was -0.18% lower along with the VIX -0.52% to 19.02.
Speaking on Thursday, Boston Fed President Susan Collins noted further tightening was needed as “Inflation remains too high, and recent indicators reinforce my view that there is more work to do, to bring inflation down to the 2% target”. Adding to this view, Richmond President Thomas Barkin said the Federal Reserve can continue to raise rates if inflation persists with Minneapolis President Neel Kashkari reiterating his commitment to getting inflation back to 2%. Policymakers are focused on avoiding repeating a 1970s policy mistake whereby victory was declared too early and rates eased with signs inflation had peaked, only for inflationary pressures to resume and move higher. From a game theory perspective, this makes sense as there is little incentive for such a repeat, even if it comes at the expense of a recession as officials are well aware of the devasting impacts of higher inflation on the economy and financial systems. Still, the market continues to push back against this view, forecasting rate cuts later this year and recently driving bond yields lower. Given higher levels of household and government debt compared with the economy, particularly as a percentage of GDP shown below, the cost of maintaining the debt burden is likely to have the desired impact on reducing spending, slowing the economy, and bringing down inflation.
Household (Black) & Government (Orange) Debt to GDP %
In economic data, the final reading of Q4 GDP was modestly lower than expected at 2.6% annualized rate compared to prior estimates of 2.7%. Personal consumption was weaker than expected at 1% compared to 1.4%, an encouraging sign that a key part of the US economy is slowing and should help to bring price pressures under control. In focus on Friday is the release of PCE inflation data for February, expected to show headline prices eased to 5.1% from 5.4% previously expanded at a 3.6% annualized rate over the month. While this would be a welcome development, core prices are expected to remain unchanged over the 12 months at 4.7%, and while this is expected to trend lower, remains uncomfortably above target. Of particular concern in recent data, inflation relating to services which account for roughly two-thirds of the US economy remains persistent adding weight to the logic for Fed officials to continue leaning hawkish in their rhetoric and not rush to cut rates sharply
Europe
European shares were also higher as technology and banking shares extended a rebound on Thursday as German and Spanish inflation was lower than expected. The Euro Stoxx 600 rose 1.03% along with the DAX 1.26%, CAC 1.06%, and FTSE100 0.74% with major benchmarks across the region all higher. EU harmonized inflation for German declined to 7.8% from 9.3% previously, missing estimates of 7.5% with the same measure for Spain declining to 3.1% from 6% previously, beating forecasts of 3.7% with both readings driven by lower energy prices and base effects, where inflation spikes from over a year ago dropped out of the measure. Attention now turns to Eurozone inflation tonight, expected to show headline inflation eased to 7.1% from 8.5% with core prices ticking up to 5.7% from 5.6%.
German (Black) & Spain (Orange) Inflation YoY%
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expected to open higher this morning with ASX200 futures up 38 points or 0.53% to 7,178. The index climbed 1.02% on Thursday, with sentiment boosted by a rally on Wall Street on Wednesday. Technology shares were the top performer, rising 1.7% followed by materials 1.49% and financials 1.48%. Major banks were higher as global concerns of stress in the financial sector eased with CBA up 1.6% along with NAB 2.3%, WBC 1.5% and ANZ 0.9%.Shares in MoneyMe slumped 19% after announcing a $37 capital raise at a 24% discount with shares closing at $0.085 on Thursday, and REIT HCW was in a trading halt after announcing a deal to acquire 11 private hospitals from Healthscope for $1.2 billion, of which $320m was expected to be raised from investors. In focus today is the release of Chinese PMI reports for March due out at 12:30 pm AEDT.
Commodities
Oil prices rose overnight with both WTI and Brent crude 1.92% and 1.2% higher at US$74.37 and US$79.22 a barrel. Iron ore futures in Singapore gained 2.02% on Thursday although are -0.82% lower this morning at US$124.30 with copper up modestly overnight by 0.12%. Gold is 0.8% higher at US$1,980 benefiting from a weaker USD, silver also rose 2.43% and Bitcoin was -0.85% lower.
Economic Data
Friday 31st March
Chinese PMI (MoM mar) 12:30
German Retail Sales (YoY Feb) 17:00
UK GDP Final (QoQ Q4) 17:00
German Employment (MoM Mar) 18:55
Eurozone Inflation (YoY Mar) 20:00
US PCE Inflation (YoY Feb) 23:30
Saturday 1st April
University of Michigan Consumer Sentiment (MoM Mar) 01:00
This article was written by Oliver Gordon, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
