As the US yield curve is deciding whether to invert/not Invert, investors seek reassurance that we are in a era of non-inflationary growth, and focus on monthly price gauges this week.
Wednesday, the US Labor Department is expected to report that its March Consumer Price Index rose 0.3% on the month and 1.8% over the year, a reading that will reinforce subdued underlying inflation and validate the Fed’s about-face after 4 hikes last year.
The CPI rose 1.5% this year to February, the smallest increase since September 2016. The latest reading of the Fed’s favorite inflation measure rose 1.8% below its 2% target.
Fed officials have started looking the new economic reality of slow growth and little upward price pressure. Even as wages creep higher, improved productivity curbs firms’ costs.
Mins of the March Fed policy meeting, to be released Wednesday, invetstors will be checking the language of the patience approach and muted inflation. The March PPI is scheduled Thursday.
A month ago the European Central Bank moved to put normalizing policy on hold and delayed a rate hike into Y 2020, further signs of weakness in the economy and an air panic among investors puts the spotlight back on the central bank.
A cautiously bad set of German industrial orders data last week pushed German Bund yields back into negative territory and though a US-China trade deal is in sight, it signaling difficult times ahead for the EU.
No policy changes are expected at Wednesday’s ECB meeting since some board members are traveling to Washington for the International Monetary Fund’s (IMF) Spring meetings.
Talk of tiered rates to ease pressure on banks, global recession fears, BREXIT, and a sense of panic that has pushed 10-year German bond yields back below Zero percent, all suggest ECB chief Mario Draghi’s news conference will be crosschecks carefully.
Investors will also keep an eye out for further details on cheap loans known as the targeted long-term refinancing operations (TLTROs), and what the ECB will do to incentivize banks to take it up.
The recovery in China factory activity surveys offered investors a bit of hope the stimulus injected in 1 of the world’s major growth engines is yielding results.
Trade data due out Friday could provide us the next clue to help investors regain confidence as they gauge if the slowdown is bottoming.
Analysts believe China’s economy is very dependent on how the trade negotiations with Washington go.
Markets took some hope from an announcement by President Trump made Thursday that Washington and Beijing could announce a trade deal within four weeks while Chinese President Xi was reported as saying progress was being made. President Trump warned Beijing it will be difficult to allow trade to continue without a pact.
Many of us believe the Chinese economy may still need more stimulus either way.
And, looking at the pattern of past decisions by the People’s Bank of China, a decision to cut bank reserve requirements may be announced by mid-April.
In the UK
After British Prime Minister May’s request to the European Council to delay BREXIT till to 30 June, focus now shifts to a meeting this week where EU leaders will discuss a proposal to offer Britain a flexible extension of up to a year.
After the British Parliament failed to approve a withdrawal agreement, Mr. May started talks last week with Labour leader Jeremy Corbyn in the hope of breaking the BREXIT deadlock, markets have not gotten excited about it.
While 1-month risk reversals for GBP, a gauge of demand for the British currency in the derivatives market, have rebounded from 2.5 year lows hit in March, they still remained way below levels seen earlier this year, indicating overall sentiment is Bearish.
Implied volatility measures also indicated caution with 1-month gauges for GBP remaining elevated despite a dip last week compared to EUR and JP.
On the Sidelines in DC
It is Spring, the time for central bank governors, finance ministers, policy makers and investors from around the globe gather in Washington for the meeting of the International Monetary Fund and World Bank. G-20 central bankers and finance ministers meeting takes place on the sidelines.
Concerns over the health of the global economy amid trade disputes and other political uncertainties will be discussed.
Major central banks’ efforts to navigate their way back to normal after years of low interest rates and easy money following the Y 2008 financial crisis have been bumpy, and central bank independence has been questioned in many countries.
Speaking ahead of the gathering the IMF’s chief Christine Lagarde has called the outlook for growth “precarious” and warned that years of high public debt and low interest rates over the past decade have left many countries with limited room to act when the next downturn arrives.
Big Bank Earnings
US big banks are set to kick off the corporate earnings season next week, Goldman Sachs (NYSE:GS) is advising investors to use Call options to position for a rally in financial stocks into May.
Goldman derivatives strategists underscored the “extreme under-performance” in the Financial Select Sector SPDR Fund, known by its ticker XLF, and the KBW Bank Index even after adjusting for the moves in equities, credit and rates. “We see the potential for a relief rally,” they wrote in a research note Tuesday.
Large-cap banks have under-performed their normal correlation with macro assets by more than 10% over the last two months, while the $22.7-B XLF has trailed it by 6%, the strategists wrote. They recommend buying calls on XLF and Bank of America Corp. to “position for this upside asymmetry.”
Specifically, they advise clients to buy XLF May $27 calls for 32c, Vs a stock reference price of $26.34, and the BAC May $29 calls for 78c Vs a stock reference price of $28.54.
Financial stocks came under pressure last month after Federal Reserve officials said they do not expect to raise interest rates this year. While XLF has recouped much of its post-Fed declines, it is still down more than 9% from last year’s high in September.
The strategists cite Goldman Sachs prime brokerage data coupled with the timing of under-performance that appears to show institutional investors, particularly hedge funds, are underweight financials. “This under-positioning creates a situation where upside asymmetry is undervalued,” they wrote.
The Q-1 US corporate earnings season begins in earnest next week, with big banks including JPMorgan Chase & Co. and Wells Fargo & Co. scheduled to report
Have a terrific week
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