US Stock Markets React to Geopolitical Tensions: 5 April 2024 Forecast and Analysis
US stock markets faced a decline in the wake of rising geopolitical tensions and hawkish Fed speak. This led to questions about the extent and scope of possible Fed rate cuts. Despite striking a fresh record high earlier in the week, the ASX 200 erased all of last week’s gains and more. This was due to headwinds from Wall Street and rising geopolitical tensions, which weighed on the local market.
The week saw a number of key events, including the European Central Bank’s interest rate decision and the release of the FOMC meeting minutes. Additionally, the Westpac Confidence Survey, CPI, and producer price index (PPI) were released, along with other economic indicators. These events had a significant impact on global markets and will continue to be closely watched in the coming weeks.
Key Takeaways
- Rising geopolitical tensions and hawkish Fed speak led to questions about the scope and depth of possible Fed rate cuts, resulting in a decline in US stock markets.
- The release of key economic indicators, including the Westpac Confidence Survey, CPI, and PPI, had a significant impact on global markets.
- The European Central Bank’s interest rate decision and the release of the FOMC meeting minutes were closely watched and will continue to be important events in the coming weeks.
Westpac Confidence Survey
The latest Westpac Confidence Survey shows that consumer confidence in the economy has increased by 3.5% since the last quarter. The survey, which is conducted quarterly, measures consumers’ expectations for the economy, job security, and personal finances.
Key findings of the survey include:
- Consumer expectations for the economy have increased by 4.2%
- Job security expectations have increased by 2.8%
- Personal finance expectations have increased by 3.1%
The survey also found that consumers are more optimistic about the housing market, with 65% of respondents expecting house prices to increase over the next 12 months. This is up from 60% in the previous quarter.
Overall, the survey suggests that consumers are feeling more confident about the economy and their personal finances. This could lead to increased spending and investment, which could further boost the economy.
CPI
In February, the US experienced a 0.4% increase in headline inflation, leading to an annual inflation rate of 3.2%, which surpassed the predicted 3.1%. Core CPI also increased by 0.4% month-to-month, resulting in an annual core inflation rate of 3.8%, which was higher than market expectations of 3.7%, but lower than January’s 3.9%.
Despite the higher-than-expected inflation rates, there was a normalization in non-housing services inflation, and declines were observed in the super core measure and the owner’s equivalent rent category. Fed Chair Jerome Powell has reassured that inflation is on a “bumpy” road to 2%, and the central bank expects to lower rates at some point this year.
This month, it is expected that headline CPI will increase by 0.4% month over month, leading to an annual rate of 3.5%. Core CPI is predicted to rise by 0.3% month over month, resulting in an annual rate of 3.7%, which is lower than January’s 3.8%.
The following table shows the US core inflation rate:
| Month | Core Inflation Rate |
|---|---|
| Feb-22 | 3.8% |
| Mar-22 | 3.7% |
| Apr-22 | 3.7% |
Overall, the CPI in the US has experienced some fluctuations in recent months, but the Fed remains confident in its ability to manage inflation and maintain economic stability.
FOMC Meeting Minutes
The Federal Open Market Committee (FOMC) meeting minutes from March are set to be released on Thursday, 11 April. During the January session, the Fed kept the Fed Funds target rate steady at 5.25%-5.50% for the fifth consecutive meeting, which was in line with expectations. The Fed’s latest dot plots indicated that the median end-2024 projection remained at 4.625%, with three 25 basis point rate cuts expected in 2024.
The Fed revised its PCE inflation and growth projections for 2024 upward, while its median unemployment rate was marked down to 4.0% in 2024 and maintained at 4.1% in 2025. The Fed Chair acknowledged that the committee had discussed slowing the pace of balance sheet runoff, but no decision was made on the size of the taper.
Investors will be closely examining the minutes for more information about the Fed’s plans for its balance sheet, additional clues about when the Fed expects to start cutting rates, and its views on the recent US data. The minutes may also provide insight into the Fed’s stance on the possibility of future rate cuts.
CPI and Producer Price Index (PPI)
China’s Consumer Price Index (CPI) registered a positive year-on-year growth of 0.7% in February 2024, after a decline since September 2023. The increase was attributed to a spending boom during the Lunar New Year holidays, with rising food prices and travel spend as the main drivers. However, China’s Producer Price Index (PPI) remained subdued with a deeper contraction of 2.7% year-on-year in February, compared to a 2.5% decline in January.
The surge in demand during the Lunar New Year holidays raised concerns about whether it can be sustained or if it is just a one-off blip. Any return to deflation ahead may easily dampen the optimism brought about by the recent upside surprises in China’s Purchasing Managers’ Index (PMI) data.
In March, China’s consumer prices are expected to ease to 0.4% year-on-year, primarily due to lower food prices. The CPI and PPI data for China are shown in the table below.
| Index | February 2024 | January 2024 |
|---|---|---|
| CPI | 0.7% | -0.1% |
| PPI | -2.7% | -2.5% |
The CPI and PPI are crucial indicators of inflation and deflation in an economy. While the CPI measures the changes in the prices of goods and services purchased by households, the PPI measures the changes in the prices of goods and services purchased by producers. The CPI and PPI data are closely monitored by policymakers, investors, and analysts to gauge the health of an economy and to make informed decisions.
European Central Bank (ECB) Interest Rate Decision
The European Central Bank (ECB) is expected to keep interest rates unchanged for the fourth consecutive meeting, with its deposit facility rate remaining at 4.0%. However, the case for the ECB to start its rate-cutting cycle as early as the June meeting has been strengthened by the unexpected easing of Eurozone’s inflation last month.
According to the minutes of the March meeting, policymakers have been laying the groundwork for imminent policy easing, stating that “the case for considering rate cuts was strengthening” and that the date of a first rate cut is now “coming more clearly into view.” Money markets are currently pricing an 80% probability for a 25 basis-point rate cut in June and predicting three to four cuts by the end of the year.
While policymakers are unlikely to give the all-clear for the inflation fight just yet, any dovish shift in tone from the March meeting or hints of discussions on rate cuts at the upcoming meeting will be closely monitored to further validate a policy move in June.
The following table shows the current ECB policy rates:
| ECB Policy Rates | Current Rate |
|---|---|
| Deposit Facility Rate | 4.0% |
| Marginal Lending Facility Rate | 5.25% |
| Main Refinancing Operations Rate | 4.75% |
The ECB’s deposit facility rate is the interest rate paid by banks on overnight deposits with the ECB. The marginal lending facility rate is the interest rate banks pay when they borrow money overnight from the ECB. The main refinancing operations rate is the interest rate at which banks can borrow or lend money to the ECB for a period of one week.
If the ECB decides to cut interest rates, it could potentially stimulate economic growth by making borrowing cheaper for businesses and consumers. However, it could also lead to lower returns for savers and investors.
