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Some things have risen, and not just your blood sugar after Sunday’s brunch or Tiger's medical bills. The latest data on US inflation drops this week, but recession and disinflation fears only continue to rise.

It’s a bank holiday across the pond, but US markets are built different.

Let’s dive in.

Economy Heat Check

As of 4/7/2023 market close, unless otherwise stated.

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Bad News Briefings

Market movers like to bury bad news on Friday afternoon, so we've decided to excavate them.

• Exxon Mobil weighs potential mega-deal with Pioneer Natural Resources (WSJ)

• Sen. Elizabeth Warren requests DOJ probe of Warner Bros. Discovery deal (PR)

• Baidu sues Apple app developers over fake Ernie bot apps (Reuters)

• Samsung forecasts worst profit in over a decade as tech slump hits memory chips (WSJ)

• Russia threatens cutting oil output by 700,000 barrels a day in March (BBG)

• Apple continues efforts to keep retail stores from unionizing (BBG)

• ByteDance posts record profit despite TikTok losses (FT)

• Tesla to build a new Shanghai factory for megapack battery (BBG)

Performance Review

Firm updates your bank may be less inclined to disclose.

• Walmart sues credit-card partner Capital One (WSJ)

• Binance's US arm struggles to find a bank to take its customers' cash (Reuters)

• First Republic suspends dividends on preferred stock (MarketWatch)

• Bank regulator drops case against ex-Rabobank US Compliance Chief (WSJ)

• Credit Suisse claims Barclays and SocGen are having tough quarters (EF)

• World Bank advocates for changes to speed debt restructuring (BBG)

• Popular emerging market FX trade back with global rates peaking (BBG)

• Venture lending faces uncertainty (WSJ)

• Private-equity funds went on a buying binge for food companies before markets crashed in 2022; their bets have now gone sour (WSJ)

Week Ahead: Signal to Noise

Next week’s market outlook and whether you should actually care.

• Monday, April 10: China CPI and PPI (🐻)

• Wednesday, April 12: US CPI (🐂); March FOMC meeting minutes (🐻)

• Thursday, April 13: US PPI (🐂)

• Friday, April 14: US retail sales (🐂); University of Michigan sentiment and inflation expectations (🐻)

Signals 🐂

US Consumer Price (CPI) 

The thought that “bad news” is actually “bad news” lasted for a whole two days last week, as U.S. markets went into the three-day holiday weekend much higher. But eyes are refreshed and now awaiting the closely-watched March consumer price index report.

To recap, stocks had slipped last Tuesday and Wednesday after several economic data points (jobs, services, PMI) came in worse-than-expected, reigniting recession fears. However, following a third piece of softer jobs data Thursday morning, investors bought the morning dip as the S&P 500 moved back above the 4,100 level and the Nasdaq climbed roughly 200-points off the morning lows.

After already seeing a moderation in price pressures, in part due to an easing of pressure on supply chains amid a weaker demand climate, the latest figures will provide clues as to whether the current downward trajectory has been sustained. Economists expect the CPI to rise 0.3% from February, lowering the year-over-year inflation rate to 5.2%. In the February report, shelter, recreation, and airline fares were among the indices rising the most sharply while used cars and trucks and medical care continued to decline following spikes in 2022. Core CPI is expected to rise 0.4% sequentially.

US Producer Price (PPI)

Not to be outdone, US PPI prints a day after the CPI. March’s producer price index report is currently forecast to print 0.1% month-over-month and 3.1% year-over-year increases, respectively.

With the annual rate of personal consumption expenditure (PCE) and core PCE continuing to soften on an annual basis, traders will be seeking further evidence in this week’s PPI. A softer report likely plays into the weaker dollar theme, as traders are once again alert to the possibility of a US recession somewhere along the line.

Instead of sitting on our hands and feeding into disinflationary fears the day before, let’s try and gauge what PPI could print through an adjacent indicator: February Factory Orders. Those just took a tumble to 0.7% month-over-month. And worse still, January was revised down to a 2.1% decline. That slows the year-over-year growth in US Factory Orders to just 2.7% – the slowest since February 2021 (above).

US Retail Sales

With renewed recession fears replacing financial meltdown concerns, expect a bearish reaction for the US dollar and major indices if retail sales stumble. Consumers are usually the last to react to a turndown. If there are fears of a recession on Main Street, in theory, consumer-related data like retail sales and household spending will suffer.

Analysts currently anticipate a 0.3% sequential decline in retail sales’ headline numbers and a 0.1% slide in core sales. Basically, the broad consensus is that recent growth acceleration is short-lived. The recent financial market turmoil, the further impact of recent interest rate hikes and the ongoing cost of living squeeze seem to have exacted further tolls on global demand.

More broad indicators – global PMIs – tell more of the story. One of the most worrying divergences is currently seen in terms of backlogs of work. The amount of orders that companies have either not yet started work on, or have yet to complete, typically provides a key metric on future output levels.

Manufacturing saw a steep build up in backlogs of work at the height of the pandemic, which have now fallen globally for nine straight months. This rate of decline is one of the steepest seen in the past 15 years. The erosion of these order backlogs, combined with a further fall in new orders, suggest factory output will weaken in coming months absent a revival of new demand.

Noise 🐻

University of Michigan Sentiment 

A report on inflation expectations released two days after the actual inflation report is about as helpful as an intern who majors in Underwater Basket Weaving. April’s University of Michigan Sentiment data is set to be posted Friday.

The index expected to tick in at 62.7, up from 62 in March. That figure marked a notable decline from February and missed the consensus estimate of 63.3. Consumer sentiment fell for the first time in four months, dropping about 8% below February, but remaining 4% above a year ago.

March FOMC Minutes

The Fed will be keeping an eye on this week’s US CPI and PPI figures, and thus, so should you. As much more fun as it would be to update your J Pow memes after this week’s release of March’s FOMC minutes. In a “bury bad news Friday afternoon” style, FOMC meeting minutes will be published later in the day CPI figures are released.

As a refresher, March saw both the FOMC and ECB hike interest rates by 25 and 50 basis points respectively despite the flaring of banking sector stress. Given the recent tightening of financial conditions, you can expect minutes from each of these meetings to be eagerly digested to assess the extent to which policy may soon be put on hold.

Regardless of the memes you may see, indicators of financial stress have continued to normalize over the past week. Despite this normalization, futures price a large Fed cutting cycle, with the first cut by September (top left, above) and a cumulative -200 bps in cuts priced through end-2024. Markets are currently pricing a deep US recession.

China Inflation Data (CPI, PPI)

In APAC, mainland China's inflation is expected to have remained subdued. We don’t know what more you expect for a country that prints what it wants. China’s trade data is also expected to show a rebound in both imports and exports after the easing of COVID-19 containment measures.

To recap, China’s consumer prices fell to 1% year-over-year in February. That was down -1.1 percentage points from January. This is good depending on how you cut it. If an export nation like China is exhibiting lower prices, this is “exported deflation,” and places less pressure on prices overseas. This is also backed up by lower inflation rates across Asia in general.

But it also means that if prices continue to soften, Beijing will unleash more stimulus in order to achieve their 2023 goal of GDP “around 5%.” Continued stimulus could instill some risk on sentiment. Then again, if oil prices continue rising and trigger a second wave of inflation, it likely means higher rates for longer globally. So, don’t expect China’s inflation figures to drop off traders’ radars anytime soon.

Undrafted

All other speeches and prints.

• Monday, April 10: EU/UK bank holiday; Wholesale trade sales and inventories

• Tuesday, April 11: NFIB small business optimism; Chicago Fed President Golsbee speaks, Philadelphia Fed President Harker speaks, Minneapolis Fed President Kashkari speaks

• Wednesday, April 12: MBA mortgage applications; Monthly budget statement; Richmond Fed President Barkin speaks

• Thursday, April 13: Weekly jobless claims

• Friday, April 14: Import and export prices; industrial production; business inventories

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