The week ahead: US CPI, the ECB and the start of earnings season

Financial markets had an inauspicious start to the second quarter. Stock markets across the US, the West and in Asia ended last week in the red, the 10-year Treasury yield rose to its highest level since November 2023, and the Vix index, Wall Street’s fear gauge, also rose to its highest level since early November after remaining subdued for most of Q1. This week’s economic data will be crucial in determining where financial markets go next, and it could give us a good steer on the timing of interest rate cuts in the US and the Eurozone. Opec will also deliver their monthly oil report on Thursday, with the price of Brent hovering near $90 per barrel, this report will be a must-watch.

US

The key economic data release will be this week’s CPI report for March. The market expects a monthly reading of 0.3%, down from 0.4% in February. The annual rate is expected to rise to 3.4% from 3.2%. Headline inflation is now being impacted by the oil price. The WTI crude price is higher by 21% so far this year, and oil prices are now boosting US inflation after subtracting from it at the end of last year. As headline inflation rises on the back of surging commodity prices, the core rate of inflation, which excludes energy and food prices, is expected to decline to 3.7% from 3.8%. This CPI report could determine if US Treasury yields rise above a key threshold. The 10-year Treasury yield closed above the 4.4% level at the end of last week. However, Wednesday’s CPI report could determine if the 10-year yield stays within its 4-4.5% range, or if it moves higher than this, back towards 4.7% or even 5%. If the latter happens, then it is hard to see how stocks can continue to rally.

FOMC meeting minutes, producer prices, import prices and consumer confidence data will also be worth watching in the US this week.

UK

In the UK, the focus will be on the monthly GDP data for February that will be released on Friday. The market expects a small uptick of 0.1% for February, which is down from the 0.2% increase in January, but if true it will add to the view that the UK’s flirtation with recession was only brief. An improvement in industrial and manufacturing production is expected, while service sector growth is expected to be tepid, at only 0.1%. This could lead to some fears that the UK consumer is struggling. On the one hand this could make future economic growth less certain, on the other hand it could make the BOE verge towards cutting interest rates sooner rather than later, which could be good news for the FTSE 250. If growth is weaker than expected, this could weigh on the pound. The pound is no longer the best performing currency in the G10 this year, that spot now goes to the US dollar, which has gained as the market has priced out rate cuts from the Fed.

Also due on Friday is Ben Bernanke’s review and recommendations on how the Bank of England can improve their forecasting models and monetary policy communication. This will be an interesting watch, especially if he suggests that the BOE adopts a Dot Plot similar to the Federal Reserve in the US.

Europe

The key event for Europe will be Thursday’s ECB meeting. The market doesn’t expect any change in interest rates at this meeting. A number of ECB speakers have recently said that it is too soon to start rate cuts as there is not enough information about the direction of wage growth. However, with the Q1 Eurozone wage data due at the end of this month, we expect the ECB to give a steer on what to expect at the June meeting. There is growing expectation that this is when the ECB will start to cut rates. The market expects the first rate cut in June, with four rate cuts expected in 2024 in total. We expect the ECB to give further guidance on whether market expectations are correct. Earlier this year, the market had expected up to 7 rate cuts from the ECB, which the Bank considered excessive. Will they be happier with 4 rate cuts, and will they give a clear steer that a June rate cut is likely? We shall have to see.

If they do, this could temper the decline in stocks and bonds, and we may see bond yields (which move inversely to price) decline this week. The 10-year German bund yield has risen nearly 60 basis points since the end of December, as global bond yields have moved in tandem. A strong US CPI report and a dovish ECB could see divergence in the global sovereign bond market, with European yields declining, even if US yields continue to rise. This could play out in EUR/USD. This pair has bounced off of the $1.0750 low but has not made big strides above $1.0830. This suggests that the market could be waiting for the ECB decision before making any big decisions on the next move for the euro.  

China and Japan

There are some key Chinese economic reports for this week. The CPI and PPI are released in March. CPI is expected to moderate back to 0.4% in March, down from 0.7% in Feb. This highlights the weak economic demand in China that is feeding weak inflation data. Exports are also expected to have fallen by 1.8% last month. Money supply is expected to be robust, which may boost the yuan, which has been trading at the low end of its trading range in recent sessions. Some analysts argue that the Chinese government is using a weak currency in favour of actual stimulus to try and boost the economy. This is seen as a fairly risky move, however, Chinese stocks mostly brushed off this concern last week, and the CSI 300 rose by nearly 2%, easily outperforming US and European markets.

In Japan, the focus will be on the PPI and wage data, as these could determine if the BOJ hike rates further this year. Industrial production is also released on Friday. The yen still remains extremely weak, although there are signs that it has stabilized at a high level above 151.50 vs. the USD. This could be on the back of official BOJ intervention, however, if the BOJ has intervened, it has not been enough to materioally the Japanese currency.

Q1 earnings season

Earnings season will also start this week. In the UK, Tesco will report annual results on Wednesday, and the market is expecting good news. Sales growth in the group is expected to have increased 5.5% and earnings are expected to rise 10.6%. The retailer has upgraded its earnings forecast multiple times in recent months, and now expects adjusted profit of £2.75bn. Anything above this level could give the share price a nudge higher. US earnings season kicks off on Friday with JP Morgan, Wells Fargo, Citigroup, State Street and Blackrock all reporting Q1 earnings. It’s worth remembering that last quarter the performance of the US’s largest banks was mixed. Net interest income will be in focus for the banking sector this quarter. JP Morgan’s net interest income rose by 19% in Q4 and is expected to rise by nearly 12% this quarter. However, trading revenue could be a weak spot in Q1 for JPM. The market expects trading revenue to fall nearly 8% in Q1 for JPM, other banks are also expected to register weak trading revenue, however Wells Fargo could buck this trend, analysts expect a 2% increase in their trading revenue for the first quarter.

Loan loss provisions and forward guidance are also worth watching closely later this week. The nonperforming loan ratio is expected to be 0.52% for Q1, the same rate as Q4, the other major global banks are expected to see similar levels of loan loss ratios. Any uptick in the bad loan rate could be seen as a sign that the economy is heading for a hard landing. In contrast, a weak bad loan rate is also a sign of economic strength in the US, which may be a factor in the Fed holding off from cutting rates in the near term.

This earnings season is important, as it comes at a delicate time for market sentiment. Treasury yields are at their highest level since November and US stocks had a mixed performance last week, and ended the week in the red. The S&P 500 was lower by nearly 1%. After a spectacular Q1 for US stocks, if the market is going to move higher, then it may take actual earnings growth and corporate profits to underpin the next leg higher for stocks. The financial sector in the S&P 500 made a record high at the end of March, and whether it can continue to move in this direction may depend on the earnings reports we get later this week.