Stock Retracement After Highs

European stock markets fell back in early trade on Tuesday as the positive momentum eased a bit. The FTSE 100 dipped a quarter of a per cent to trade at 8,400, with similar modest losses elsewhere on the continent.  

Wall Street finished mixed on Monday with the Nasdaq posting a record intraday and closing highs as Nvidia stock rose 2% ahead of the company’s Q1 earnings update on Wednesday; the Dow Jones fell half a per cent as JPMorgan shares fell 4.5% after CEO Jamie Dimon suggested the stock was overvalued.  

Dimon said he wouldn’t repurchase stock at the current levels, which investors took as an implicit indication the stock is overpriced. The market seemed to say: “OK, well if you don’t want to buy back stock at that level, how do you like this level?”.

Meanwhile, Nvidia caught some bullish analyst calls ahead of the earnings tomorrow. Options markets imply an 8% move in the stock — for a $2.3tn company that is very significant.

Commodities Ignore Falling Inflation

The gold price eased back from the record high above $2,240, oil retreated after closing below the 200-day line yesterday. Silver and copper also eased back a bit after racing higher.  

Inflation is falling – but copper, gold, silver, etc. did not get the memo. Markets think the Fed and ECB are throwing in the towel and inflation will go higher again. As I have said many times, CBs are in a bind: they are going to tacitly and then explicitly accept higher structural inflation. This was evident since the Fed went for AIT (average inflation targeting).

It was evident after that Lagarde speech I keep harping on about — the one last April, which I took to mean that central banks in developed countries would act together to suppress rates as we head into an economic (and maybe real) war that will require ever-higher deficits. It’s about financing promises at home and abroad – domestic bliss and foreign wars, in the words of BofA.  

So now we can expect inflation to run higher – they want this as it’s positive for the debt burden. They also know there is not a lot they can do contain higher inflation due to structural shifts in the global economy — fragmentation of supply chains, deglobalisation, geopolitical strife, trade wars, the festering dislocation caused by the pandemic, etc. It’s not worth going the last mile.  

Comments From Fed Speakers

Meanwhile, we are in the midst of a torrent of central bank speakers this week. Fed governor Barr said Q1 inflation was disappointing and did not provide confidence to ease policy. Cleveland Fed president Mester said the forecast of three cuts this year is too many — the market already believes this.  

We hear from the Fed’s Williams, Bostic, Barkin and Waller today. Waller is the one to pay the closest attention to since he is the best cue for changes in Fed policy. FOMC minutes are due tomorrow.  

Bank of England

The Bank of England’s Deputy Governor Ben Broadbent laid the groundwork for a summer cut:  

“If things continue to evolve with its forecasts … then it’s possible Bank Rate could be cut sometime over the summer.”  

Governor Bailey is due to speak later.  

Meanwhile, UK grocery inflation has declined to just 2.4% this morning. I repeat what I said yesterday — UK CPI data this week is expected to show a decline to 2.1% from 3.2% in March, paving the way for the Bank of England to cut rates soon.  

Bear in mind, though, that there is one more inflation reading before June after that — so the market will be hesitant to bake in assumptions until then.

RBA Minutes Show Rate Hikes Discussed, UK Inflation Due

Watch out for a fair bit of bond issuance today which could see yields move around. Canada’s latest inflation data will be eyed with markets expecting a cut in June as inflation comes down and growth cools.    

Reserve Bank of Australia meeting minutes showed policymakers considered raising rates as the flow of data since the previous meeting had “mostly been stronger than expected”, and that it was “difficult either to rule in or rule out future changes’ to rates”.  

At the last meeting the RBA kept interest rates at a 12-year high of 4.35% and signalled they may not be cutting anytime soon with inflation risks skewed to the upside — though it stopped short of adopting a tightening bias.

Sterling advanced to its best in two months. GBP to USD is currently trading at $1.2717. The UK CPI is due this week.

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