Swissquote Bank: All eyes on US CPI
By Ipek Ozkardeskaya, Senior Analyst, Swissquote Bank
American and Canadian officials have spent the last few hours imposing tariffs on each other—only to roll them back —adding to the absurdity of the tariff situation. The problem is that this tariff charade has real-time consequences and that’s weighing on investor sentiment and pressuring market valuations.
American manufacturers are already paying significantly more for aluminum, steel, and copper than their overseas rivals as they rush to accumulate stocks before tariffs go live – which could happen overnight. The widening gap between the raw material prices paid by Americans versus their European and Asian peers is making the American manufacturers less cost-efficient compared to rivals, weighs on business confidence and fuels inflation even before the tariffs are imposed. And the expectation for squeezed profit margins due to actually rising raw material prices is weighing on market valuations.
As a consequence, the market volatility is rising as visibility becomes cloudier by the day, any market rebound may not be viable unless there is a form of stability in the White House – but that doesn’t seem to be on the menu du jour. The higher volatility will likely convince more investors to step out of their bullish positions. Given the high long positioning in the US assets, we could see the selloff extend.
All eyes on US CPI
The US will update its inflation numbers today and tomorrow, and the data is important. It’s important because the tariff situation will probably start to show in producer prices, then impact consumer prices in the continuation. As such, today’s CPI data is expected to show a slight easing for both headline and core inflation in February, and for both monthly and yearly figures. On Thursday, the PPI data may also show slower inflationary pressures for February. Afterall, the energy prices have been tumbling since the start of the year and that could counter the rise in food prices, especially the egg crisis. But whether the disinflation could continue is yet to be seen.
A set of inflation numbers in line with expectations, or ideally softer-than-expected, won’t guarantee that inflation will remain under control but will give a bigger margin to the Federal Reserve (Fed) to act if necessary. A set of inflation numbers above expectations, on the other hand, would be the sour cherry on top of an already staling cake. The higher the inflation the less likely the Fed will cut the rates, unless the market selloff gets ugly to an extent to threaten the financial stability.
The US dollar continues to lose value across the board on the expectation of a sharp US economic slowdown that could even lead to a recession in the second half. Activity on Fed funds futures hints that the first rate cut from the Fed is seen in June, but acceleration of the market selloff could pull the timeline to May. For now, the probability of a May cut is given around 60% chance.
Across the Atlantic, yesterday saw the selloff in the Stoxx 600 index accelerate. The initial sugar high due to massive spending plans is now replaced by negotiations across the political spectrum as the parties involved are trying to get a bigger part of the cake for themselves... But in fine, security comes first. Therefore, the European stocks should continue to outperform their US peers on converging growth expectations between the two continents. The convergence trade between the S&P500 and the Stoxx 600 should remain in play. Inflation from European defence spending could – at least in the short run - remain limited for specific sectors, which could eventually allow the European Central Bank (ECB) to keep its rates at a sweet spot to growth across Europe.