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Morning Bid: Commodity prices irk inflation view

[April 09, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

As Wall Street nervously awaits the March consumer price inflation report, the commodity complex - buoyed by an improving global growth outlook - adds another complication to the interest rate picture.

Markets are already anxious their long-favored month for the start of the U.S. rate cut cycle may turn up a blank and rate futures now see June as a coin toss for the Federal Reserve following another impressive jobs report last week.

Even though the European Central Bank, Bank of England and Bank of Canada are all still favoured to cut that month, implied probabilities of a move in all three have also wobbled a bit this week.

And as China's factories show signs of a significant rebound alongside a still-brisk U.S. expansion, rising energy and metals prices may add another reason for central banks to remain cautious about easing credit too early.

Shanghai copper prices traded at record highs on Tuesday on optimism around positive manufacturing signals from the major economies, with global copper futures now up about 10% for the year to date. Record high gold prices are up about 12% in 2024 and the CRB core commodity index is up 15%.

Even though U.S. crude oil prices have backed off a little from last week's 2024 high, they are still up more than 20% since the start of the year.

The positive twist for commodity stocks in the resource based sector is offset by the additional headache this gives central bankers already wary about inflation stuck stubbornly above 2% targets.

Minneapolis Fed President Neel Kashkari, who last week said there may be no rate cuts this year if inflation continues to move sideways, reiterated his stance overnight and said the Fed cannot stop short on its inflation fight.

JPMorgan boss Jamie Dimon struck a similar note in his annual letter to shareholders this week, saying the resilient economy, high public spending and disruptive geopolitics "may lead to stickier inflation and higher rates than markets expect".

There was little clarity from the latest New York Fed survey on Monday. The poll showed the public sees inflation a year from now at 3%, unchanged from the prior month, but they raised their three-year view to 2.9% while cutting the five year outlook to as low as 2.6%.

However, the survey also showed creeping nervousness about job security and debt repayments.

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The Wall Street entrance to the New York Stock Exchange (NYSE) is seen in New York City, U.S., November 15, 2022. REUTERS/Brendan McDermid/File Photo

And this was something dovish Chicago Fed chief Austan Goolsbee chimed with on Monday too, saying the U.S. central bank must weigh how much longer it can maintain its current interest rate stance without it damaging the economy.

"You've got to pay attention to how long do you want to be that restrictive," Goolsbee said. "If you're there too long, the unemployment rate is going to start going up."

The upshot for stocks was a flat Monday and futures have shifted little overnight.

U.S. Treasury yields got some respite ahead of a series of big auctions this week, starting with $58 billion of 3-year notes later on Tuesday. U.S. 10-year yields slipped back from 2024 highs, ebbing below 4.40%, and the dollar came off the boil too.

Despite worries about U.S. public debt load, Morningstar DBRS confirmed its AAA credit rating of the U.S. Treasury on Monday.

The other focus of the week is the start of the corporate earnings season on Friday.

Annual S&P500 profit growth through the first quarter is penciled in at 5%, with revenue growth of some 3% - cooler than 7% and 4% forecasts respectively seen at the start of the year.

However, earnings growth is still expected to accelerate back to as high as 14% by the final quarter of the year.

And while the expected annual earnings expansion for the full calendar 2024 has slipped about two points to just under 10%, the 2025 outlook has been revised up by a similar amount to near 14%.

Key diary items that may provide direction to U.S. markets later on Tuesday:

* US March NFIB small business survey,

* Swiss National Bank vice chair Martin Schlegel speaks

* US Treasury sells $58 billion of 3-year notes

(By Mike Dolan, editing by Ed Osmond, mike.dolan@thomsonreuters.com)

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