The Federal Reserve’s interest rate stance hinges on incoming data such as Wednesday’s consumer price report, but fears of recession remain just that.
Despite warnings about financial sector disturbance and a plethora of ‘ifs and ‘buts’, the International Monetary Fund’s base case in Tuesday’s updated global forecasts remains pretty benign – shaving growth expectations for this year by just a tenth compared to January to 2.8%.
While it revised up its core inflation outlook, the IMF actually lifted its U.S. growth outlook for 2023 and 2024 to 1.6% and 1.1% respectively.
That’s hardly boom time, but it’s not the deep recession many fear. And it’s certainly not what the deepest yield curve inversion in more than 40 years between 3-month paper and 10-year notes suggests to many investors.
But if you consider rising speculative short positions in S&P 500 futures, where weekly CFTC data show net shorts held by speculators have almost doubled in the month to April 4, then it appears that many hedge funds are already braced for stock reversal and the burden of proof on a recession may be rising.
What’s more, cash holdings in money market funds have soared by more than $350 billion since before the banking blowup last month even though fears of systemic contagion have subsided. While much of that money may stay there for near-5% interest rate returns, some may rebalance back into wider markets.
And so investors return to scrutinising the Fed to see if the central bank forces the recession by tightening ever further.
Today’s CPI report is expected to show headline inflation falling as low as 5.2% in March from 6% previously – showing the disinflation journey over half way back from 40-year highs of 9.2% last June to the Fed’s 2% target, Core rates excluding energy and food are the bother, however, and are expected to have ticked higher to 5.6% – above the headline rate.
With Fed policy meeting minutes due later in the day, the runes of what must have been a tense gathering of officials in the middle of the regional banking shock will be eyed closely.
Overnight Fed speeches sent some mixed signals again.
Minneapolis Fed President Neel Kashkari reckoned recession was still a risk but inflation wouldn’t get back close to the 2% target until next year. Philadelphia Fed chief Patrick Harker touted one last hike and then “sitting there for a while.”
Chicago Fed boss Austan Goolsbee was more in wait-and-see mode.
Ahead of the CPI number, futures markets now see a 75% chance of one last quarter-point rate hike to the 5.0-5.25% range in May. Two-year Treasury yields clung on to 4% and the dollar was steady.
With bourses around the world modestly higher on Wednesday, Wall St futures were also a shade higher. The VIX volatility gauge was subdued just above 19.
Hong Kong stocks underperformed overnight – with geopolitical tensions high surrounding Taiwan and Chinese military operations around the island.
As the IMF and World Bank’s Spring meetings get underway, G7 finance ministers and central bankers gather on the sidelines on Wednesday – chaired by Japan.
