Macro Digest: US March CPI release and the complacent market backdrop. Macro Digest: US March CPI release and the complacent market backdrop. Macro Digest: US March CPI release and the complacent market backdrop.

Macro Digest: US March CPI release and the complacent market backdrop.

Steen Jakobsen

Chief Investment Officer

Summary:  A look at the US March CPI release on Wednesday, the reaction function and the variety of market scenarios that investors are juggling, from an incoming recession to surprisingly stubborn inflation and even an extension of the current expansion cycle. What is absent, however, is any sufficient level of concern on how these scenarios could play out.


The US March CPI is on tap for Wednesday, April 12. Bloomberg consensus expectations for core inflation are +0.4% MoM and +5.6% YoY. SaxoStrats see the reading more likely at 0.4% and +5.7% YoY.

The main drags of late on inflation have come at the core from falling used car prices (down nearly -9% last four months and -13.6% YoY as of February) and in headline inflation from gasoline (down -2.0% YoY in Feb despite Russian invasion just over a year ago) and of late natural gas prices (down -5% over the last five months to Feb. before another large drop in spot natural gas prices in March.) Upside contributors for both core and headline have come from transportation services, electricity, food and the notoriously lagging and heavily weighted Owner Equivalent Rent (OER: up 8.1% YoY in February).

In the consensus view, a decelerating the next few months should continue to see 0.3-0.4% and resulting in an end-of-year 3.7% CPI (Core) in the consensus view.

SaxoStrats don’t share this view as we expected the energy component to swing positive in the second half of this year, meaning that all of the hoped for moderation of inflation would have to come from the OER falling quickly, something we see unfolding more slowly than the market does.

The market is extremely complacent. The Q1 trading range was a modest sub-10% despite the banking turmoil, which may have actually helped the market climb the wall of worry on the sharp drop in yields as Fed hike expectations were quickly reduced after the early March Silicon Valley Bank collapse. This market is a trader’s market with no direction or conviction. Looking at the mere facts: Here using my own 4-Factor model, which makes it pretty clear where the strong Q1 snapback performance came from: Financial conditions are over-easy after the March banking turmoil scare. Bond volatility is back to its long-term average and Dollar and the Fed next 18 months are both hitting YTD lows.

Source: Bloomberg

But remember this is due to the majority of market players “betting” that a recession will happen in the second half of this year. We continue to fade both that trade and inflation falling persistently below 4%.

Overall, market participants seem to be weighing three scenarios (Source: Goldman Sachs)

GS surveyed 1000 institutional managers and got the following top three choices for the most prominent regime for now:

  • Sticky Inflation: 21%
  • Recession: 36%
  • US Cycle Extension: 24%

Conclusion: We remain closer to the base case of sticky inflation than the other two scenarios, but don’t really buy into the cycle calls here as we want to be flexible. A sticky inflation outlook in theory means we should remain long commodities (oil and gold), short the US dollar and short equities (we are neutral on equities in SaxoStrats).

Bigger macro piece is coming later this week…

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.