Fundamental News Facts for 4th April, 2024

Fundamental News Facts for 4th April, 2024

[Quick Facts]

1. Makoto Sakurai says the BOJ may wait until fall before raising rates.
2. Kugler says it’s appropriate to lower interest rates this year.
3. Powell is still not confident enough about a sustained fall in inflation.
4. U.S. services growth slows, price index falling to a four-year low.
5. Oil prices may rise to $100 a barrel if OPEC+ extends production cuts.
6. U.S. ADP employment rebounds beyond expectations in March.
7. Euro-Area Inflation Inches Toward 2% With Focus On June Cut
8. Will the NFP Report Take June off the Rate-Cut Map?
9. Escalating Geopolitical Tensions Propel Gold Prices to New All-Time Highs Just Above $2,300
10. Pound Sterling A Sell With BCA Research, “Big” Move Seen Coming

[News Details]

Makoto Sakurai’s Perspective on BOJ’s Future Actions
Makoto Sakurai, a former policy board member of the Bank of Japan (BOJ), has suggested that the BOJ might postpone any decisions regarding further interest rate hikes until October. This comes after the BOJ successfully navigated the complex process of phasing out its extensive stimulus program. Sakurai predicts that the normalization of policy will likely commence next year, potentially with a 25 basis point rate hike every six months. He anticipates no drastic measures this fall, and expects the shift towards normalization to start in 2025, assuming the economy continues to perform well. Regarding the yen’s depreciation increasing the chances of intervention, Sakurai believes that unless the dollar exceeds 160 against the yen, the decision will be made by Japan’s Ministry of Foreign Affairs, especially considering the U.S.’s reduced likelihood of further rate hikes.

Kugler Advocates for Lower Interest Rates
Federal Reserve Governor Kugler, in a speech delivered on Wednesday, argued that inflation could decelerate further this year without significantly impacting employment or economic growth. This scenario, he believes, would create the right conditions for interest rate reductions. He suggests that weaker consumer spending could help slow economic growth, which is expected to be less robust than last year’s impressive 3.1%. Additionally, he notes that demand for workers is also diminishing. As demand growth cools against a backdrop of solid supply, Kugler’s primary expectation is that a further slowdown in inflation can be achieved without a sharp increase in the unemployment rate. If the slowdown and labor market conditions evolve as he anticipates, he believes it would be appropriate to reduce policy rates this year.

Powell Awaits Clearer Signs of Inflation Drop
Federal Reserve Chairman Jerome Powell stated on Wednesday that policymakers will wait for more definitive indications of decreasing inflation before contemplating a rate cut. Despite recent inflation data exceeding expectations, Powell asserts that it has not significantly altered the overall situation. Regarding inflation, he admits uncertainty about whether the recent data represents a mere temporary fluctuation. He maintains that a rate cut would not be suitable until there is greater confidence that inflation is consistently moving towards 2%. Following Powell’s comments, Treasury yields continued to rise, and the S&P 500 also saw gains. Based on futures market pricing, investors widely anticipate the first rate cut to occur in June and suspect there may not be three rate cuts this year.
Powell mentioned last month that an unexpected weakening in the labor market could warrant a policy response from Fed officials. The Fed will receive another update on the health of the job market on Friday with the release of the monthly employment report, which is expected to show a gain of 213,000 jobs in March.
In March, Fed officials were divided on how aggressive rate cuts will be this year. The central bank’s “dot plot” showed that 10 officials forecast three or more quarter-point cuts this year, while nine anticipated two or fewer.
Powell also used part of his speech to emphasize that the central bank makes its decisions independent from politics. He added that he believes it is inappropriate for him to weigh in on other public policy issues, such as climate change policies.
Powell stated in his opening remarks ahead of a fireside chat that given the strength of the economy and the progress on inflation so far, they have time to allow the incoming data to guide their policy decisions. He added that if the economy evolves broadly as they expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year.
Powell’s prepared remarks reinforce those he made following the March meeting. They also suggest that the Fed is unlikely to reduce rates at their next gathering taking place from April 30 to May 1.

Slowdown in U.S. Services Growth
The U.S. ISM non-manufacturing PMI fell by 1.2 to 51.4 in March, marking the second consecutive month of slowdown. This is largely attributed to the supplier delivery index reaching a record low. The non-manufacturing price index dropped by over five points to 53.4, its lowest level since March 2020, contrasting with the ISM manufacturing data. The services price data could alleviate market concerns that the Fed’s progress on inflation may be stalling.

Potential Rise in Oil Prices
The market’s expectation that OPEC+ would not recommend any changes to its production cuts was confirmed at its Wednesday meeting, despite Brent crude prices climbing to $90. This sets the stage for a tight market and potential further increases in oil prices in the coming months. If anyone believed that the recent rise in oil prices would motivate Saudi Arabia and its allies to alleviate the supply crunch, this meeting would have dispelled that notion. Oil prices around $90 are precisely what the Saudis and their allies desire. Traders will now be closely watching the upcoming OPEC+ ministerial meeting in June. Whether or not OPEC decides to extend production cuts into the second half of the year will be a crucial factor in determining if oil prices can reach $100 a barrel.
On Wednesday, oil prices saw an upward trend as investors contemplated the potential supply risks due to the Ukrainian attacks on Russian refineries and the possibility of an escalation in the Middle East conflict. Meanwhile, the ministers of OPEC+, an alliance of oil-producing countries, did not propose any new policy changes in their meeting, maintaining the current output cuts.
The Brent crude futures for June experienced a rise of 75 cents, or 0.84%, reaching $89.67 per barrel at 1130 GMT. Concurrently, the U.S. West Texas Intermediate crude futures for May saw an increase of 73 cents, or 0.86%, amounting to $85.88 a barrel.
In their Wednesday meeting, the OPEC+ ministers did not put forth any new policy recommendations, according to two sources. This comes after the group’s decision last month to extend the current production cuts until June.
The oil futures built upon the gains from Tuesday, when both Brent and WTI saw a 1.7% increase, reaching their highest levels since October. The prices soared on Tuesday following a new series of Ukrainian drone attacks on Russian refineries, which threatened to further reduce the country’s processing capacity.
Investors also expressed concerns about the potential spread of conflict in the Middle East after Iran pledged retaliation against Israel for an attack that occurred on Monday, resulting in the death of high-ranking military personnel. A broader conflict in the Middle East involving more oil-producing nations could lead to supply disruptions. Iran, which supports the Hamas militia fighting Israel in Gaza, is the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC).
PVM analyst Tamas Varga noted that the escalating tensions in both regions pushed the price of the two crude oil futures contracts to their highest levels this year.
Bank of America Global Research, in a note on Wednesday, increased its 2024 forecasts for Brent and WTI to $86 and $81 a barrel respectively. This adjustment was based on strengthening demand and rising political tensions. The bank stated that geopolitical unrest has also amplified oil demand through longer trade routes and affected supply by reducing refining capacity due to attacks on Russian energy infrastructure.
In other news on Wednesday, Taiwan experienced its strongest earthquake in at least 25 years, which briefly led Formosa Petrochemical to suspend operations at its Mailiao refinery as a safety measure. However, operations have since resumed.
Later on Wednesday, the U.S. Energy Information Administration (EIA) is set to release oil inventory data. According to traders on Tuesday, data from the American Petroleum Institute reported a decrease in crude inventories by 2.3 million barrels last week.

U.S. ADP Employment Exceeds Expectations in March
The U.S. March ADP employment report revealed that job numbers increased by 184,000, surpassing the anticipated 150,000 and the previous 140,000. The data showed strong job growth across almost all sectors, with the exception of professional services where employment declined. After several months of steady deceleration, wages for job stayers grew steadily at 5.1%. Meanwhile, wage growth for workers who changed jobs rose sharply to 10%, marking the second consecutive month of increase. Although the ADP data did not see a significant change, it demonstrated relatively strong job growth of 184,000 jobs. Coupled with the impact of February’s data being revised upwards, expectations for U.S. economic growth have been bolstered. Furthermore, the job openings and factory orders data exceeded expectations, and the solid performance of economic data has led to decreased market expectations for the Fed’s interest rate cuts this year. In addition to wage growth, the market was also surprised by the industries recording wage growth. The construction, financial services, and manufacturing industries saw the largest increases in the number of people changing jobs. Inflation has been cooling, but the data shows that wages in both the goods and services sectors are rising, which is not good news for inflation.

Euro-Area Inflation Inches Toward 2% With Focus On June Cut

In the Euro-area, inflation has decelerated more than anticipated, solidifying the likelihood of an interest-rate reduction by the European Central Bank (ECB) in June. Consumer prices experienced a year-on-year increase of 2.4% last month, a decrease from February’s 2.6%, aligning with a Bloomberg Economics Nowcast model. This was contrary to analysts’ predictions of a 2.5% increase. A metric that excludes unstable elements such as food and energy also declined more than expected, to 2.9%.
This report contributes to the growing body of evidence suggesting that policymakers are on the right track to bring inflation back to the 2% target. This would enable them to gradually ease some of the restrictions imposed after price gains soared into double digits. ECB President Christine Lagarde has indicated a potential first cut in June, a decision informed by new forecasts and an update on wage growth in the early part of the year.
The majority of the Governing Council, which includes officials from Germany, France, and Spain, have agreed to this timeline. Only a few are holding onto the possibility of an earlier move. Economists and money markets are in alignment, suggesting that it would require a significant shock to alter this course.
Following the report, traders maintained their bets on the potential for rate cuts this year. They are pricing in three quarter-point reductions starting in June, with approximately a 60% chance of a fourth cut. This is in contrast to the potential for as many as four cuts priced ahead of last month’s monetary-policy decision.
While disruptions in shipping in the Middle East have not significantly impacted inflation in Europe, and the recent collapse of a bridge in Baltimore, a crucial port for car manufacturers and other industries, is also unlikely to have an effect, increasing wages within the 20-nation euro zone could potentially fuel prices.
Philip Lane, the Chief Economist, insists that wage increases must continue to decrease for him to consider reversing some of the ECB’s previous hikes. Although a key compensation gauge showed some moderation at the end of 2023, salaries continue to grow by more than 4%. This is maintaining price pressures in services, where labor has a significant impact on final costs.
Inflation in that sector remained at 4% in March, while the rate for non-energy industrial goods fell to 1.1%. Across the region, trends vary. Spanish inflation accelerated after the government removed some of the support implemented to control energy costs, and Italy also experienced an increase. In contrast, both German and French readings showed that inflation eased for a third month.
These trends make it challenging to determine the optimal path following the ECB’s initial cut. Policymakers have already begun to shift some focus to discussing the pace of subsequent steps, although they insist that ultimately, economic data will dictate the decision.
Lagarde also asserts that the ECB will respond to new information as it becomes available. She stated last month that “this implies that, even after the first rate cut, we cannot pre-commit to a particular rate path.”

Will the NFP Report Take June off the Rate-Cut Map?

During its most recent meeting, the Federal Reserve (Fed) exhibited a more dovish stance than anticipated, indicating three quarter-point rate cuts for the year 2024. This led market participants to reinstate their bets for a rate cut in June, raising the likelihood of a 25 basis point reduction to approximately 80%.
However, this assessment proved to be short-lived. The previous week, Fed Governor Waller expressed that the Committee is not in a hurry to initiate interest rate cuts, a sentiment that was echoed by Fed Chair Powell on Friday. This followed the release of the core PCE index, which came in as expected at 2.8% year-on-year.
This development allowed those bullish on the dollar to re-enter the market, augmenting their positions on Monday after the ISM manufacturing PMI for March showed expansion for the first time since September 2022. The prices subindex increased to 55.8 from 52.5, reinforcing the outlook provided by the S&P Global flash PMIs for the month, which indicated that selling prices rose at the quickest rate in nearly a year.
Coupled with the upward revision of the Atlanta Fed GDP Now model to 2.8% from 2.3% for Q1, these recent developments led investors to once again reassess their rate reduction bets. According to Fed funds futures, the probability of a first quarter-point reduction in June has fallen to around 65%, while the total number of basis points worth of rate cuts anticipated by the end of the year has been lowered to 68.
Contrasting with the anticipation of around 160 basis points at the start of the year, the market is now expecting fewer reductions than the 75 basis points projected by the Fed itself. This introduces downside risks to the dollar in the event of disappointing data in the future.
The question arises: will further easing in the labor market sound the alarm bells? With this in mind, the next significant event on investors’ agenda may be Friday’s US employment report for March. The unemployment rate is expected to have remained steady at 3.9%, and nonfarm payrolls are predicted to have decelerated to 205k from 275k. However, the rebound in the employment subindex of the ISM manufacturing PMI suggests the risks are tilted to the upside. Average hourly earnings are anticipated to slow slightly to 4.1% year-on-year from 4.3%.
These figures indicate further relaxation in the labor market, but they are far from suggesting that a rate cut is imminent. After all, another month of job growth above 200k is very encouraging for the economy, while a wage growth rate at around 4% is unlikely to accelerate the reduction of inflation faster than previously thought.
The dollar is likely to continue to outperform the euro, especially as money markets have more than fully priced in a June quarter-point reduction. Following recent dovish comments by ECB member Villeroy de Galhau and Stournaras, there is nearly a 20% chance of a cut at the upcoming meeting on April 11.
The euro/dollar fell below the critical support zone of 1.0795 on Thursday and accelerated its decline this week, heading for the crucial area between 1.0655 and 1.0695. A decisive dip below 1.0655 could have significant bearish implications and potentially pave the way towards the 1.0520 barrier, marked by the lows of October 26 and November 1.
However, if the jobs report disappoints, the pair may rebound and break back above 1.0795. But for the outlook to start looking brighter, a move all the way above the round number of 1.1000 may be necessary.

Escalating Geopolitical Tensions Propel Gold Prices to New All-Time Highs Just Above $2,300

During Wednesday’s European trading session, gold prices (XAU/USD) reached an all-time high near $2,290 (later above $2300), driven by various positive factors. However, the price of the precious metal subsequently experienced a downturn. Despite this, the short-term demand for gold remains robust due to escalating geopolitical tensions in Eastern Europe and the Middle East. These tensions are driving investors towards safe-haven assets like gold. Even with the rise in bond yields and the diminishing expectations for rate cuts by the Federal Reserve (Fed) in June, the ongoing geopolitical uncertainties continue to bolster gold prices.
The yields on 10-year US Treasury bonds have surged to 4.37%. This increase comes as Fed policymakers express their confidence in the robust economic outlook and the tight conditions of the labor market. Loretta Mester, the President of the Cleveland Fed Bank, emphasized the importance of not rushing into rate cuts. She stated, “I think the bigger risk would be to begin reducing the funds rate too early.” This reluctance by the Fed to cut rates could further tighten the labor market, potentially leading to increased wage growth and inflation. Typically, higher bond yields diminish the attractiveness of gold as an investment due to the higher opportunity cost associated with holding the precious metal.
The key event of the week will be the release of the United States Nonfarm Payrolls (NFP) data on Friday. This labor market report will shape market expectations regarding potential Fed rate cuts in June.
Despite these economic factors, the upward momentum in gold prices persists amid heightened geopolitical tensions. This bolsters the demand for safe-haven assets while the US Dollar retraces from recent four-month highs. The escalating geopolitical uncertainties are prompting investors to seek refuge in assets like gold.
In Eastern Europe, ongoing drone attacks launched by Ukraine against Russian oil refineries have exacerbated tensions between Moscow and Kyiv. President Joe Biden voiced concern over Ukraine’s targeting of Russia’s oil infrastructure, warning of potential severe repercussions on global oil prices. This situation further underscores the complex interplay of geopolitical events and economic factors influencing the global gold market.

Pound Sterling A Sell With BCA Research, “Big” Move Seen Coming

In a recent research note evaluating the future prospects of the British Pound, analysts from an independent research firm have noted that the Pound has seen benefits in the past few months. These benefits are primarily due to a stabilization in housing prices and a resilient job market. However, Chester Ntonifor, a Foreign Exchange Strategist at BCA Research, points out that much of this positive news is already well-known among economists and market participants.
This observation is made in the context of a favourable technical setup that suggests a significant downward movement might be on the horizon. Ntonifor explains that the British Pound has been trading into the apex of a very tight wedge, a pattern that historically suggests a significant technical move is imminent. The expectation is that this move will be towards the downside.
BCA Research suggests that the likely trigger for a pullback in the Pound will be external rather than domestic. Ntonifor explains that the UK, which runs a large balance of payments deficit, relies heavily on portfolio flows to fund domestic spending. A significant change in these flows could likely be the catalyst for a pullback in the value of the Pound.
Ntonifor further elaborates that foreign holdings of UK equities are around 70%, and for bonds, it is about 30%. Therefore, portfolio flows have a disproportionately large effect on the performance of the Pound. BCA Research warns that equity portfolio flows are at risk as the majority of UK shares are in the financial, industrial, or energy sectors.
Ntonifor points out that energy prices have been soft, particularly due to warmer weather and a rising supply of Liquefied Natural Gas (LNG). Financials are likely to suffer if interest rates decline, as this will eat into net interest margins. While industrials offer some glimmer of hope, many other markets provide much better exposure to reshoring and/or a green energy revolution. Simply put, earnings revisions in the UK are falling relative to its trading partners, and this has usually been a negative for the Pound-Dollar exchange rate.
BCA Research recommends selling Pound-Dollar at 1.28, predicting that the exchange rate will bottom around the 1.20-1.22 level as stale speculative longs liquidate their positions. In the longer term, the Pound is considered “cheap” and BCA suggests it can recover when the dollar eventually enters a bear market.
The longer-term value of the Pound will depend on capital inflows. Ntonifor emphasizes that the UK needs to be at the forefront of disruptive technologies such as electric cars, digital currencies, 3D printing, and green technology. He concludes by saying that BCA Research will be monitoring the UK’s productivity growth in the next few quarters for evidence that this thesis is playing out.

Sources :

– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc

Prepared to you by “Akif Matin“