European were flattish in early trade as investors looked to consolidate gains of the last few sessions ahead of a key US inflation report after shrugging off the worst fears around the banking ‘crisis’. Stocks have come back this week, trimming monthly losses for March that have in turn trimmed the quarterly advance for majority of indices. This morning sees real estate and banks off by around 1% on the Stoxx 600…fears flickering still. 

Heading into the final session of the quarter the scores on the door so far (and not expecting much in the way of significant shifts today): S&P 500 + 5.50%, Nasdaq +15%, FTSE 100 +2%, DAX +11.50%, CAC +12%, TOPIX +6%, Hang Seng +3.5%., ASX +2%.  

So, a solid quarter but the gains largely front loaded in the first two months of the year as the market picked up on hopes the Fed would pivot – no one foresaw that a banking crisis and credit crunch might the reasons for this. China’s reopening was another factor. The clear under-performance of the UK market reflects a couple of things – one is the out-performance in 2022; the FTSE was coming in to 2023 in much better shape than peers, at least on a 12-month basis. And the decline in banking shares and oil majors has weighed.   

PCE inflation today is the last big data point – a report yesterday showed US jobless claims rose more than expected, suggestive of some cooling in the labour market. This in turn suggests that the Fed might be less inclined to keep on hiking – the dynamic between inflation and the labour market continues to be the prime consideration for the Fed and I think the market is going to have to reassert a higher for longer expectation once again – this will lead to yet more volatility in rates and repricing in the front end. This is already happening tentatively - the US 2yr yield rose above 4.1%, jumping from 3.8% Monday and notching its biggest 4-day advance in seven weeks.   

So, to the PCE data - core PCE increased 0.6% for the month in January and was up 4.7% from a year ago. Headline inflation increased 0.6% and 5.4% respectively, all above consensus expectations and underlining the Fed’s difficult task in raising rates. The figure for Feb is expected to be unchanged at 4.7%, though the monthly figure is expected to ease to 0.4%.  

German and Spanish inflation eased thanks to the base effects of energy price spikes, but underlying pressures remain strong. French inflation also down with the EU figs out later at 10am. UK house prices fell at the steepest rate since 2009. But growth is better with GDP rising 0.1% in the final quarter of 2022 to shrug off a recession.  

Data overnight was mixed - Japan retail sales rose 6.6% against 5.8% expected, whilst factory output rose 4.5%. Tokyo inflation eased on government energy price subsidies, but the core-core measure increased. China’s official manufacturing PMI eased to 51.9 from 52.6 but beat expectations, whilst the service sector notched its fastest expansion in 12 years in March as the domestic economy rebounded from Covid restrictions.  

Meanwhile, the UK announced it will join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the first European nation to do so. It will add 0.08% to GDP...nice work team.  

Tighter regulation of banks was always the outcome: The White House released statement detailing how "the weakening of common-sense bank safeguards and supervision during the Trump Administration for large regional banks should be reversed". Blaming the last guy was always the playbook, too. First Republic Bank fell 4% yesterday but is up 14% for the last five sessions; KRE regional banks ETF fell 2% and is off 30% over the last month. 

The dollar traded weaker and is on course to notch a second straight quarterly decline. Sterling rallied to its best since January, with GBPUSD hitting 1.24 overnight before trimming gains. EURUSD tested the March highs at 1.09250 before trimming gains. USDJPY meanwhile through the 50-day line with a tentative bullish MACD crossover.