Rising yields of government bonds, falling prices of oil and food and the FED – Invesco

Last week, ten-year US government bond yields rose to levels not seen since November last year. The reason was the US Consumer Price Index (CPI) published a few weeks ago, which was not expected, and which caused the markets to change their collective view on the policy of the Federal Reserve System (Fed) this year. This view was first sent by last week’s retail sales, which were higher than expected, and so by the statements of the Federal Free Market Committee. A few vt from last week:

Fed Governor Philip Jefferson: If the data indicate that inflation is permanent, not at the moment, it will be appropriate to strike the current restrictive stance of the policy according to. I am fully committed to getting inflation back to 2%.

From Fed Chairman Jay Powell: The recent data clearly did not deliver the door to them, and on the contrary indicate that it will likely take longer than expected to reach that door. For the time being, due to the poor labor market and the current progress in the area of ​​inflation, it is appropriate to give the restrictive policy time to act and let the data and evolving insight grow. If inflation persists, the current level of restrictions will be maintained as long as it lasts.

President of the New York Fed John Williams: We have a rate year such that, yes, we have a gradual movement towards our goals, so there is definitely no urgency to lower the rate year.

Oil prices fall despite tensions on the Middle East

West Texas Intermediate crude oil prices actually fell from recent highs last week. This was a surprise for some, due to the high tension at the entrance to the Blizzka, but I think it removed several key factors:

First, US oil production has been a game-changer in terms of moderating the impact of geopolitical risks in the Middle East on oil prices. According to the US Energy Information Administration, the United States is the largest oil producer as of 2018. Its production in 2023 at 12.9 million barrels per day was much higher than that of the second largest oil producer, Russia at 10.1 million barrels per day, and Sadsk Arabia at 9.7 million barrels per day.

The tension at Blzka’s entrance is indeed high, but not as great as many have feared. In my opinion, the reaction rate between Russia and Israel is very controlled, with the aim of expressing dissatisfaction with the previous act of aggression, but above all to prevent the escalation of military actions.

Thus, it is expected that the new conventional assumption that rates will be high for a long time will cause a certain degree of demand destruction, which, according to my view, will put pressure on the drop in oil prices.

Hopes for rapid disinflation in Great Britain continue

The latest values ​​of the consumer price index in the United Kingdom supported the thesis that inflation in the United Kingdom will remain. Service inflation eased, but not as much as market watchers would have liked. In addition, wage growth in the United Kingdom slowed me down, not as expected. This has caused markets to change their collective view of when the first Bank of England rate cut will occur.

However, I believe that the rate dream will come before the end of the second quarter. That is why I was reassured by the words of the Deputy Governor of the Bank of England, David Ramsden, who said: Given that we know more than the Ofgem price ceiling for April, and so with regard to the frozen fuel duties in the new budget, then we can be sure that under the same conditions, the overall currency inflation by the consumer price index will drop sharply in April and rise to 2% cli. The sharp rise in unemployment in the United Kingdom from January’s 3.9% to Norway’s 4.2%, in my view, will help to argue for a relaxed rate sooner rather than later.

The Eurozone is making significant progress in disinflation

The inflation rate in the Eurozone for March is at 2.4%, which is less than 2.6% in Norway and 2.8% in January. This is a positive progress considering that a year ago the average inflation rate was 6.9%. Core inflation, excluding food and energy, was flat without revision at 2.9% of mid-year and without the tax it was flat at 2.6%. In my view, this development practically guarantees that the European Central Bank will approach the rate dream at its annual meeting.

on and Canada

It is also worth noting that the German gross domestic product in the first quarter was a positive surprise and improved significantly. This indicates that the member of fiscal stimulus closes the door and has a delayed impact on the economy.
Meanwhile, the Canadian federal budget for 2024 was released last week. It contains some interesting proposals that could support economic growth and contribute to the external financial stability of the household, thus raising concerns about the government debt and the high cost of servicing it, even though it is far from obvious , such as concerns raised south of the Canadian border, in the US.

Consequences for assets

Risk assets are clearly under pressure and are likely to continue to be, but with trade-offs. I know it will pass. So I know that the Fed rate hike in July and overall rate hikes this year are still very real possibilities. The markets, however, are unlikely to change their outlook, and therefore the pressure on risk assets is unlikely to ease until significant data emerges that will show both progress in disinflation and a less hot economy.

When we think about our hopes for the upcoming dates, we remember what Antonio Salieri, the rival of Wolfgang Amadeus Mozart (at least in the film) once said: I speak for all averages. I am their defender… I am the patron saint of mediocrity. Well, in recent weeks we could use some Salieri-type CPI and retail sales data. And I hope that in the next few weeks and months there will be some Salierian moments in the US economic data, average inflation data and general economic data, which are not surprisingly in the upward direction.

As soon as we see evidence of disinflammation in the US, we have reason for optimism. I think the decline we’ve had is healthy. Valuation of risky assets is then more attractive. In the secondary markets, there is therefore known cash that could be transferred to the markets. This view is also supported by the comment of the financial editor of one of the world’s major banks, who was heard last week during an interview about the results of the economy: …there is a lot of cash here at the moment. This could tell you that this supports the ability to see continued flows of assets under management into the future, depending on how… of course, the stock market as well. But we all have huge amounts of cash sitting on the sidelines at the moment. I don’t think it’s an anomaly; I am aware that many banks have noted the amount of cash they are laying aside.