Investing.com -- The hot March inflation report has resulted in an unwinding of rate cut expectations for June, and traders will look at the producer prices report for more clarity. The European Central Bank holds its latest rate-setting meeting, while the earnings season kicks into top gear.
1. Fed rate cut expectations for June unwind
The hotter-than-expected March consumer inflation report has resulted in an unravelling of Federal Reserve rate cuts expectations, with a reduction in June now looking more and more unlikely.
The annualized reading of the closely-watched consumer price index increased by 3.5% last month, above the pace of 3.2% notched in February, and more than the 3.4% expected. The year-on-year core figure, which strips out volatile items like food and fuel, stayed at an elevated 3.8%, against expectations for a decline.
This robust data has seen the futures markets pricing in just 40 basis points of cuts this year, compared to 150 basis points priced in at the start of 2024.
It has also prompted Goldman Sachs to push back its forecast of the first rate cut from June to July.
“We continue to expect cuts at a quarterly pace after that, which now implies two cuts in 2024 in July and November,” analysts at the influential investment bank said, in a note dated April 10.
UBS is even more pessimistic, with the Swiss banking giant now looking for the first cut to come in September, as it removes a June rate cut as its base case.
The data should be “particularly troubling for the Fed,” said analysts at UBS, in a note dated April 10. “They have been saying that it would not be appropriate to cut rates until they gained further confidence that inflation was moving sustainably toward their 2% target.”
“It is no longer clear that inflation is even on a slowing trend, let alone moving toward 2%.”
U.S. producer prices are due for release later in the session, and investors will be hoping for a clearer picture of March inflation.
The headline annual figure is expected to have risen 2.2%, from 1.6% in February, while the month-on-month release is set to show a 0.3% increase, a drop from the prior month’s 0.6% rise.
2. Futures largely unchanged ahead of PPI release
U.S. stock futures were little changed Thursday, as investors nervously awaited another inflation report after the previous session’s hot consumer prices reading.
By 08:08 ET (13:08 GMT), the Dow futures contract was xx points, or x.x%, higher, S&P 500 futures climbed 11 points, or 0.2%, and Nasdaq 100 futures rose by 62 points, or 0.4%.
The main Wall Street indices closed sharply lower Wednesday in the wake of the CPI report, as investors begin to factor in the Federal Reserve implementing fewer rate cuts this year than previously expected.
March producer prices are due later in the session, and economists are looking for monthly wholesale prices to have grown by 0.3% in March, and 0.2% when excluding food and energy.
There will also be earnings from the likes of used vehicle retailer CarMax (NYSE:KMX), supply chain solutions company Fastenal (NASDAQ:FAST) and drinks giant Constellation Brands (NYSE:STZ) to digest before the opening bell.
3. ECB to signal a June rate cut?
The European Central Bank holds a rate-setting meeting later in the session, and investors are pretty confident that its officials will decide to keep borrowing costs unchanged at a record high.
However, with inflation retreating quickly and the eurozone suffering from economic weakness, all eyes are on President Christine Lagarde's accompanying press conference to see whether she indicates that a rate cut could come as soon as June.
The ECB has kept interest rates steady since September, but policymakers have been uttering dovish noises of late with the currency bloc now in its sixth straight quarter of economic stagnation and inflation only marginally above the central bank’s 2% medium-term target.
“We expect the ECB to signal rising, but insufficient confidence in rate cuts,” said analysts at BofA Securities, in a note dated April 5. “We still expect the first cut in June.”
4. Earnings to save the day?
The new corporate earnings season starts in earnest on Friday, with a series of major banks set to release their first-quarter numbers.
With the major U.S. stock indices at highly elevated levels and doubts growing that the Federal Reserve will start cutting interest rates any time soon, this earnings season will likely have to be impressive to avoid a hefty retracement.
However, analysts expect to see earnings growth of 5% in the first quarter, according to LSEG data. That would be the lowest since the second quarter of 2023.
That said, the early evidence is encouraging.
Delta Air Lines (NYSE:DAL) on Wednesday forecast a strong profit in the current quarter after reporting better-than-expected earnings in the first quarter.
Wells Fargo has also expressed confidence, as its team of strategists lifted the price target on the S&P 500 to 5535 from the prior 4625, implying an upside potential of more than 6%.
“To some degree, we believe a moderation of Fed expectations is helping not hurting the SPX's performance, as it maintains the status quo which is constructive for large caps, the Growth/ secular AI trade, and Momentum,” the bank said, in a note.
5. Crude remains supported by Middle East tensions
Oil prices edged higher Thursday, as the situation in the Middle East remained fraught, threatening the security of supplies from this crucial oil-rich region.
By 05:05 ET, the U.S. crude futures traded 0.4% higher at $86.56 a barrel, while the Brent contract climbed 0.4% to $90.85 per barrel.
Israel and Hamas have begun a fresh round of negotiations in any attempt to end the more than six-month-old Gaza war, but confidence is not high that these discussions will result in an agreement.
At the same time, there remains the risk that the militant group’s backer Iran, the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), is dragged into the conflict, particularly as a consequence of a suspected Israeli airstrike on Iran's embassy in Syria at the start of the month.
Official data on Wednesday showed U.S. oil inventories grew 5.8 million barrels in the week to April 5, more than expected, and the third consecutive week of outsized growth in U.S. stockpiles.
OPEC releases its monthly oil market report later in the session, ahead of the equivalent report from the International Energy Agency on Friday.