US equities extended a recent rally, boosted by inflation data which was softer-than-expected
United States
Year-on-year PCE inflation, the Federal Reserve’s preferred measure, rose 5.0% down from 5.4% previously and modestly below estimates of 5.1%. In a further encouraging sign, core price also eased to 4.6% from 4.7% in January, compared to estimates to remain unchanged. The data adds to further evidence that price pressures have peaked for now and continue to trend lower, although remain uncomfortably above target, especially on an annualized basis with both measures expanding at 3.6%. Market pricing continues to suggest the Fed is at or near peak rates, with roughly a 50% probability of a 0.25% increase in May followed by expectations of as many a 2.5 rate cuts by January 2024. Treasury yields were lower following the data release, with the 2-year yield down -9.4 basis points along with both the 10 and 30-year rates by -8.1 and -8.4 basis points respectively. The yield curve continues to steepen, although remains well in negative territory measured by the 2 and 10-year rates.
US PCE Inflation (YoY %)
While since the early 2000s this has been a bearish signal for equities, typically as something within the system broke, during the late 70s and 80s, a steepening curve after an inversion was typically followed by a rally in equities over relief that inflation had been tamed, and maybe a more valid comparison to current times.
S&P500 vs Yield Curve
The S&P500 rose 1.44% on Friday in broad-based gains with 94% of stocks higher and all sectors, positive taking a weekly advance to 3.48%. The Dow Jones was also 1.26% higher along with the Nasdaq Composite 1.74% and Russell 2000 1.93% with the VIX retreating -1.68% to 18.70. Based on the structure of the VIX curve, which has previously been highlighted in these updates to measure buying and selling opportunities, the potential for further gains remains. The second pane on the chart below shows the structure of the curve, which is yet to reach levels below 0.85 which typically coincide with levels of complacency among investors and often coincides with key highs. However, it should be noted these readings tend to have different outcomes in different market conditions. Between October 2020 and October 2021, the structure of the curve continued to suggest a high degree of complacency among investors, only for equities to continue their strong march higher.
S&P500 vs VIX Curve
Ahead of the week, ISM manufacturing PMI data for March is in focus overnight Monday expected to show the sector remains in contractionary territory. Private ADP employment data for March on Wednesday is forecast to show 205k jobs were added for the month, ahead of Friday’s non-farm payroll data forecast to show 238k jobs were added and the unemployment rate remaining stable at 3.6% with the employment market remaining strong.
Europe
European shares also rose on Friday, helping to trim a monthly decline that ranks as the worst March since 2020 amid concerns around the financial sector and European Central Bank which remains on a hawkish path. Concerns around the potential for a recession remain with Marija Veitmane of State Street Global Markets noting “After all the volatility we have seen this quarter, it’s increasingly clear that avoiding recession would be very hard…The market’s thinking you either get there via something breaking — such as a banking crisis — or via inflation being sticky and rates needing to remain high for some time”. The Euro Stoxx 600 rose 0.66% along with the DAX 0.69%, CAC 0.81%, and FTSE100 0.15% The coming week is relatively light for European economic data, with the final readings of March PMI reports the only notable release. Eurozone core inflation year-on-year to march edged higher to 5.7% from 5.6% previously as forecast, while headline inflation cooled more than expected to 6.9% from 8.5% a welcome development for the ECB, although with core inflation remaining high, the central bank is likely to continue tightening policy.
*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 45 points or 0.63% to 7,236. The index climbed 0.78% on Friday driven by gains in materials 1.88%, financials 0.54%, and health care 1.09%. Shares in EML Payments (EML) were a notable performer, rallying 31% after confirming its FY2023 guidance under which it expected revenue of $235-245m and EBITDA of $26-34m. That helped offset negative news whereby the company’s Irish subsidiary, PFS Card Services was placed under a nil percent growth cap for the next 12 months by the Central Bank of Ireland, down from 10% previously in relation to significant deficiencies relating to anti-money laundering and counter-terrorism financing control framework. Ahead this week, an RBA rate decision is in focus on Tuesday where according to market pricing, the central bank is likely to keep rates unchanged at 3.6% and roughly a 25% chance of an increase in May. An RBZ rate decision on Wednesday is also in focus where a 0.25% increase is expected, as well as Chinese PMI reports for March on Thursday.
RBA Cash Rate Futures Implied Probability
Commodities
Oil prices closed higher on Friday with both WTI and Brent crude up by 1.75% and 1.64% respectively to US$75.67 and US$79.89 a barrel. Base metals were mixed with aluminium up 1.13% along with nickel 2.75% while copper -0.09%, lead -1.47%, tin -0.31%, iron ore -1.37% and zinc -0.32% were all lower. A stronger USD weighed on gold on Friday despite modestly lower real yields, with the precious metal -0.56% lower at US$1,969 an oz while silver gained 0.82% along with Bitcoin 0.86%.
Economic Data
Monday 3rd April
Australian Manufacturing PMI Final (MoM Mar) 09:00
Australian Building Permits and Home Loans (MoM Feb) 11:30
Eurozone Manufacturing PMI Final (MoM Mar) 18:00
US ISM Manufacturing PMI (MoM Mar) 00:00
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.
