Marketmind: War and PCE
Send a link to a friend
 [February 24, 2023]
A look at the day ahead in U.S. and global markets from Mike Dolan
With world headlines focussed on first anniversary of Russia's invasion
of Ukraine, the inflationary consequences that pounded world markets
last year still smoulder.
Curiously, the initial energy shock from the Ukraine war is already less
of a problem than the change in pricing behaviour that it seeded -
especially in services still distorted by the pandemic, in corporate
margin building and rising wage settlements.
Due to powerful base effects comparing today's price with the surge
after the invasion, crude oil prices are now falling at an annual rate
of 16%. And thanks to Europe's mild winter, brimming storage and gas
substitution, yearend natural gas prices are back to where they were 11
months ago - down more than 31% so far in 2023.
But it's the pickup and stickiness in underlying "core" prices,
excluding energy and food, that is irking the central banks and the
Federal Reserve most of all.
And if the world economy is gathering some steam again in 2023, as
recent numbers suggest, interest rate policy may have to be a lot
harsher than everyone has assumed.
Alongside another tight U.S. weekly jobs report, markets got another
glimpse of those price pressures on Thursday.
The Commerce Department showed inflation increased much faster than
initially estimated in the fourth quarter of last year, with the core
personal consumption expenditures (PCE) measure that the Fed favours
accelerating at a 4.3% pace compared with prior estimate of 3.9%.
The revisions to prices were led by used and new motor vehicles and fees
for nonprofit hospital services.
Friday gets a more updated monthly view of core PCE from January and
it's not yet clear if quarterly revisions affect the standing consensus
forecast for an easing of the rate to 4.3% from 4.4% in December - still
more than twice the Fed's target.
Markets are now braced for three more quarter-point rate hikes from the
Fed to at least 5.25%-5.50%, with no cut fully priced from there by
yearend. At 4.71% on Friday, two-year Treasury yields are close to cycle
highs.
Although cheered on Thursday by chip designer Nvidia's blowout earnings
and upbeat outlook, S&P500 stock futures are back in the red - barely
clinging to the pivotal 4,000 point level.
[to top of second column] |
A shopping cart is seen in a supermarket
in Manhattan, New York City, U.S., June 10, 2022. REUTERS/Andrew
Kelly/File Photo
And increasingly buoyed by the still intense geopolitical fallout
from a year of the war in Ukraine, the dollar pushed higher yet
again.
Whether China now backs Moscow militarily as well as rhetorically is
seen as one of the biggest global questions surrounding the war 12
months on and would mark critical juncture in Western relations with
Beijing too - and in trade globalisation more generally.
China's offshore yuan fell to its lowest level of the year against
the dollar on Friday.
The dollar also rose against Japan's yen on Friday, with the
Nikkei's 1% gain bucking the dour weekend mood elsewhere, after
comments by the incoming Bank of Japan chief.
Even though data showed Japan's core consumer inflation hitting a
fresh 41-year high in January, Kazuo Ueda insisted the BOJ must
maintain ultra-low interest rates to support the fragile economy,
warning of the dangers of responding to cost-driven inflation with
monetary tightening.
Key developments that may provide direction to U.S. markets later on
Friday:
* U.S. January personal income and spending, PCE inflation indices,
January new home sales; Kansas City Fed February service sector
survey
* Cleveland Federal Reserve President Loretta Mester, Fed Board
Governor Philip Jefferson, Boston Fed chief Susan Collins speak.
Bank of England policymaker Silvana Tenreyro speaks
* Japan's Prime Minister Fumio Kishida chairs G7 leaders meeting.
Finance ministers of G20 countries and their central bank chiefs to
meet near Bengaluru
* U.S. Treasury sells -year notes
* U.S. corp earnings: Evergy
(By Mike Dolan, editing by Tomasz Janowski mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
[© 2023 Thomson Reuters. All rights
reserved.]
This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.
 |
