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*Data as of 4pm WAT
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Latest Economic Update: US Consumer Price Index (CPI) February Highlights
Inflation Rates Exceed Expectations: February saw a 0.4% CPI rise and a 3.2% year-over-year increase, surpassing projections. Core CPI also exceeded predictions with a similar monthly rise and a 3.8% annual increase.
Key Inflation Contributors: Notable increases in energy (2.3%) and shelter costs (0.4%) drove over half of the CPI growth.
Market and Federal Reserve Reaction: Despite the CPI data, market responses were subdued with slight increases in futures and yields. The Federal Reserve, noting inflation above its 2% target, may postpone interest rate cuts.
Economic and Labor Indicators: Despite strong GDP growth and job additions, persistent high inflation, particularly in housing, remains a key concern for economic stability and policy direction.
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Market Commentary:
Currencies/Macro:
The US dollar remained relatively stable against most G10 currencies. The EUR/USD experienced a slight decline, losing 15 pips to close at 1.0925. The British pound was the weakest performer among the G10, decreasing by 0.4% to 1.2810. The USD/JPY traded within a narrow range, fluctuating between 146.49 and 147.16.
The New York Federal Reserve's consumer expectations survey indicated a slight increase in inflation expectations for February. The one-year-ahead inflation projection remained nearly unchanged at 3.04%, up slightly from 3.00%. However, there were more notable increases in the longer-term expectations, with the three-year projection rising to 2.7% from 2.4% and the five-year expectation climbing to 2.9% from 2.5%.
In a related comment, ECB Chief Economist Philip Lane mentioned in a blog post that minor adjustments in the timing of interest rate decisions are unlikely to have a significant impact on inflation outcomes. This statement suggests a perspective that near-term rate decisions might not be pivotal in the broader context of the ECB's inflation targeting strategy.
Interest Rates:
The yield on the US 2-year Treasury note increased from 4.48% to 4.54%, and the yield on the 10-year note rose from 4.06% to 4.10%. Market expectations for the Federal Reserve's funds rate, set at 5.375%, forecast no change for the upcoming meeting on 20 March, but there's an 80% likelihood of a rate reduction by June.
Credit market spreads were varied, with the Main index widening by half a basis point to 52.5, while the CDX index remained relatively stable at 49.5. U.S. investment-grade (IG) cash credit was slightly stronger, ranging from flat to a one basis point improvement, as issuers sought to enter the market ahead of the Consumer Price Index (CPI) data release scheduled for this evening. In Europe, eight issuers accessed the market, raising approximately EUR 6.1 billion. Meanwhile, in the U.S., nine issuers priced a total of USD 11.7 billion.
Commodities:
Crude oil markets remained steady in anticipation of the upcoming monthly reports from OPEC and the IEA, with increasing output from Iran seemingly restraining price advances. The April West Texas Intermediate (WTI) contract experienced a slight increase of 0.13% to $78.11, whereas the May Brent contract rose by 0.41% to $82.42. A Reuters analysis highlighted a significant divergence in the fuel demand forecasts from OPEC and the IEA, with the IEA projecting a 2024 demand increase of 1.22 million barrels per day (mbpd) and OPEC estimating 2.25 mbpd, marking the widest gap in their perspectives over 16 years. Iran's export levels have reached a peak not seen since 2018, coinciding with the awarding of $20 billion in development contracts for the South Pars gas field, expected to significantly boost Iran's gas and condensate output. Additionally, a notable transaction was reported where a substantial wager on Brent crude reaching $95 in April involved the purchase of options equivalent to around 16 million barrels.
In the metals sector, copper finished strong, surpassing $8,600 to close at $8,654, up by 0.87%, while aluminum appreciated by 0.5% to $2,252. Nickel achieved a new high since the previous November, climbing 1.5% to $18,275. Although there were no major news updates, Codelco's Radomiro Tomic copper mine in Chile experienced a halt in production due to a fatal accident, and the China Copper Company advocated for collaborative industry efforts following a sharp decline in copper treatment charges.
Iron ore witnessed its most significant drop since 2022, reflecting declining steel prices that reached their lowest point since the prior June and peak inventory levels for the year. The April Singapore Exchange (SGX) contract fell by $6.85 to $107.60, and the 62% Mysteel index decreased by $8 to $108.55, reaching its lowest since August. Over the weekend, China's Housing and Urban-Rural Development Minister emphasized that real estate should be utilized for living rather than speculation. Concurrently, the China Iron and Steel Association reported a 14% month-over-month decrease in steel production for the final ten days of February, capturing the post-Lunar New Year period.
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