Financial Markets’ Weekly Recap

US Inflation Surges: CPI Hits 3.5% in March

In the latest update from the US Bureau of Labor Statistics (BLS), inflation in the US, as gauged by the Consumer Price Index (CPI), demonstrated a notable uptick. March saw a year-on-year increase to 3.5%, up from February’s 3.2%, surpassing market forecasts by hitting 3.4%.

Delving into the core CPI, which factors out the influence of volatile food and energy prices, a similar trend was observed. March’s annual core CPI matched February’s ascent, climbing to 3.8%.

March also witnessed a monthly increase of 0.4% in both the CPI and core CPI, slightly outpacing analysts’ projections of 0.3%. These figures indicate a persistent upward trajectory in inflation, signaling potential implications for monetary policy and economic outlooks in the near future.

During the latest release of the Federal Open Market Committee (FOMC) Minutes, participants expressed widespread uncertainty regarding the duration of elevated inflation. They indicated that recent data did little to bolster their confidence in inflation gradually converging towards the 2% target.

Furthermore, officials engaged in deliberations over whether the predominant risk lies in monetary policy remaining excessively restrictive for an extended duration or in the Federal Reserve easing prematurely, thereby failing to achieve the 2% inflation target. Some officials continued to argue that significant factors such as housing inflation would begin to decelerate, with “several” suggesting that increases in productivity could facilitate robust economic expansion while inflation simultaneously recedes.

However, the minutes portrayed a prevailing sense of concern regarding the status of the inflation battle, which seemed to be under control earlier in the year.

ECB

As anticipated, the European Central Bank (ECB) maintained status quo on Thursday, leaving key rates unchanged in the aftermath of the April policy meeting. Consequently, the interest rate on the main refinancing operations, as well as those on the marginal lending facility and the deposit facility, will remain at 4.50%, 4.75%, and 4.00%, respectively.

Wall Street

On Friday, heavy selling engulfed US stocks, spurred by disappointing results from major US banks. This downturn capped off a week marked by persistent inflationary trends, evolving Federal Reserve policy expectations, and looming geopolitical tensions.

All three major indices experienced losses exceeding one percent throughout the week.

Preliminary data reveals that the Standard & Poor’s 500 index dropped by 75.46 points, or 1.45 percent, closing at 5,123.60 points. Similarly, the Nasdaq Composite index witnessed a decline of 266.50 points, or 1.62 percent, settling at 16,175.09 points.

The Dow Jones Industrial Average also suffered, shedding 478.29 points, or 1.24 percent, to reach 37,980.79 points by the end of Friday’s trading session.

Oil

Oil rose about 1 percent on Friday due to geopolitical tension in the Middle East, but suffered a weekly loss due to negative expectations from the International Energy Agency for the growth of global demand for crude and concerns about the slowdown in US interest rate cuts.

Brent crude futures rose 71 cents, recording $90.45 per barrel, while US West Texas Intermediate crude futures increased 64 cents to $85.66.

Brent fell 0.8 percent on a weekly basis, compared to a decline of more than 1 percent for US crude.

Fears of a possible Iranian response to an attack by suspected Israeli warplanes on the Iranian embassy in Damascus at the beginning of this month contributed to supporting oil prices, which approached their highest level in six months this week, despite discouraging factors such as an increase in US inventories.

An American official said that the United States expects an attack by Iran on Israel, but it will not be large enough to drag Washington into war. Iranian sources said that Tehran indicated a response aimed at avoiding a major escalation.

Analysts at ING said they expect the oil rise to subside unless there is further escalation in the Middle East or a supply disruption.

Prices trimmed their gains for a short period after the International Energy Agency lowered its forecast for growth in global oil demand in 2024 to 1.2 million barrels per day. However, the Organization of the Petroleum Exporting Countries (OPEC) expected on Thursday that growth would record one million barrels per day higher than the agency’s expectations, which is what… Support prices.

Friday’s gains erased some of the losses recorded in the previous session, which was dominated by concerns about US inflation, which reduced hopes for a cut in interest rates in June.

JPY

The Japanese yen hit its lowest point against the US dollar since 1990, trading at 153.24 on April 10, signaling significant downward pressure. Japanese financial authorities issued official warnings about potential intervention in response to this decline. Despite the Bank of Japan’s move away from negative interest rates in March, the yen’s value continues to suffer, with its real effective exchange rate index dropping to its lowest levels since records began in 1994.

The yen’s decline has persisted for over three years, losing about a third of its value since the beginning of 2021. Contributing factors include Japan’s persistently low interest rates, which remain below 0.1%, in contrast to higher short-term US interest rates ranging between 5.25 and 5.5%. The significant yield gap between US and Japanese government bonds, around 370 basis points at 10 years, further weakens the yen.

Investors are drawn to “carry deals,” borrowing yen at lower costs and investing in currencies with higher returns, especially during periods of low market volatility. This practice is fueled by the underlying interest rate differential between Japan and other economies.

Despite the BOJ’s policy shift in March, which was anticipated, investors feel comfortable maintaining or increasing short positions on the yen due to the absence of potential sharp interest rate hikes in the future. Short positions on the yen reached a ten-year high in April.

Major Japanese financial institutions, such as Japan Post Bank and Japan Post Insurance, have signaled no significant changes in their investment strategies following the BOJ’s policy shift, preferring to keep their funds abroad for higher returns.