US equities saw sizeable declines this week as risk sentiment was hit by the conflict in the Middle East and by a further rise in Treasury yields to new year-to-date highs as Fed Chair Powell signalled a higher-for-longer stance on rates. The S&P 500 saw its largest weekly fall since March last year while the Nasdaq was down by its most since November 2022. US exceptionalism underpinned an uplift in the IMF's forecast for global growth (3.2%) this year and remains a key driver behind US dollar strength. Q1 growth in China was above expectations at 1.6% (5.3%Y/Y), but the IMF highlighted downside risks from the downturn in the property market.
A shift in tone from Fed Chair Powell effectively validates markets repricing to a delayed start to the easing cycle in the US. Commenting on last week's stronger-than-expected CPI report for March, Chair Powell said that it was likely that it would now take longer for the policy-making FOMC to garner the confidence that inflation is headed back to the 2% target on a sustainable basis. While waiting for more progress on inflation, the current level of rates could be maintained "for as long as needed". Although the Fed's Beige Book (April) reported a slowing in growth and highlighted a weakening in discretionary spending, retail sales data for March came in well above estimates up 0.7% on a headline basis (vs 0.4%) and 1.1% in the control group (vs 0.4%).
Market pricing for rate cuts in the UK was scaled back in the face of stronger-than-expected wage and inflation data; however, comments from BoE Governor Bailey largely restored expectations for 2 cuts this year. Although inflation continued to decline in March: headline CPI easing from 3.4% to 3.2% and the core rate softening from 4.5% to 4.2%, these latest outcomes came in firm relative to expectations. Meanwhile, services inflation - the component of the CPI basket being watched closely by the BoE - showed minimal progress at 6%yr from 6.1% previously. The persistence of services inflation coupled with earnings growth in February's labour market data slowing less than expected to an annualised pace of 6% (from 6.1%) sparked a hawkish repricing of BoE rate cut expectations, with the first cut pushed back to November. This was then reassessed as BoE Governor Bailey spoke in Washington highlighting that inflation was still "on track" to decline as expected and that the dynamics of price pressures were different to the US where demand was stronger. Later in the week, the BoE's Ramsden said that risks to the persistence of domestic inflationary pressures were easing.
Euro area inflation estimates for March were finalised at 2.4%yr in headline terms (from 2.6% in February) and 2.9%yr on core (from 3.1%). ECB rates are likely to be cut in June and many officials from the central bank reiterated that message this week. However, the ability for ECB to diverge from Fed policy remains a key discussion point; Austria's central bank governor Holzmann said that, in his view, 3-4 ECB cuts this year was an unlikely scenario if the Fed did not ease policy.
More volatility was seen in the latest Labour Force Survey in Australia. In March, employment fell by a net 6.6k, a downside surprise on estimates for a modest rise (7k) following February's seasonally-related surge in hiring (117.6k). This resulted in the unemployment rate lifting from 3.7% to 3.8%, though a larger increase may have been kept at bay due to the participation rate easing from 66.7% to 66.6%. Despite the weakness in March, underlying momentum in employment is solid rising by 122.3k through Q1 - its largest quarterly rise in a year - for an average increase of 40.8k per month. Overall, the solid momentum in employment together with a continuation of low unemployment indicates that the domestic labour market remained resilient through the early part of the year to a slowing growth backdrop. My full review of the March Labour Force Survey can be accessed here.
