US Equities Rise as Inflation Moderates, Fed’s Approach Shifts

Even though limited data is available, it’s convincing enough to suggest negative credit impulse is building. So when taken together with the softer inflation print, it could make Fed officials hesitant about even a May hike. But for sure, it lowers the bar for a June pause and likely a long one after that so the Fed can gauge the objective economic impact of tighter credit against the still lofty inflation metrics. Hence the Fed is likely one and done, at least for now.

While perhaps not the immediate ideal mix to signal all aboard the rally wagon with inflation running at 5 % and weaker credit impulse expected to do the more heavy lifting.

Still, the CPI data is the latest piece of the puzzle, suggesting that the Fed is progressing in its war against inflation. And comes “fast on the heels” of signs that previous Fed hikes are rebalancing the labor market favorably for a soft landing. Indeed this is good news for the soft landing camp as the inflation shock has ended, even as the focus now turns more intently to the path forward for the Fed.

This week, we get further insight into the inflation and growth outlook with the March PPI reading later Thursday and March Retail Sales on Friday.

Growth remains topical for markets, especially after banking stress in March. Hence the dust is far from settling.

FOREX

Overall the anticipated policy remix cements the challenging list of factors weighing down the US dollar. The most critical change for the framework is that in the wake of SVB, tighter lending standards can substitute for rate hikes.

Substituting lending standards for rate hikes has the opposite effect of raising the dollar’s risk-free rate, which tends to stunt incoming investment stateside and hurt the US dollar.

The more significant the drag on US growth from restricted bank lending, the more dovish the Fed can be in its fight against inflation, which could weaken the dollar even further.

OIL

With oil traders emboldened by the OPEC PUT, along with recent data showing that China’s infrastructure boom may already be taking off as construction activity surged in March to its higher level in over a decade, suggesting more barrels are getting burned in China, oil prices are doing well.

But prices moved even higher overnight, supported by weaker US dollar post-CPI data which should create an FX-driven tailwind through import channels.

GOLD

With latent recession risk at 50 %, gold could move higher on the net. However, it may be more of a slow grind than a continued spike. In our view, it will be challenging for gold to move sustainably above $2050/ oz without a Fed cutting rates in a US recession scenario that sees it pivot towards growth support.

Although this view continues to flip as quickly as pancakes at the Pancake House, with the S&P 500 making decent headroom above 4100, it supports the soft landing crew and is less bullish for gold.