Written Commentary
CURRENCY FUTURES
The U.S. dollar index was supported in the overnight trade due to a safe haven flow of funds. However, the greenback is now lower on the day.
The longer term trend for the U.S. dollar is higher since interest rate differentials have turned more favorable. The Federal Reserve is likely to remain restrictive for longer, while other major central banks will probably become accommodative sooner.
German producer prices fell less than expected in March, decreasing by 2.9% on the year when analysts had expected a 3.2% decline.
Retail sales volumes in the U.K. were flat in March 2024, following a revised 0.1% increase in February and missing the market expectation of 0.3% growth.
In the longer term, lower prices are likely for the euro currency and the British pound.
The annual inflation rate in Japan ticked lower to 2.7% in March 2024, matching the market consensus.
Bank of Japan Governor Kazuo Ueda suggested a possible need to raise interest rates again if the yen’s depreciation continues.
STOCK INDEX FUTURES
Stock index futures were sharply lower in the overnight trade in light of increased tensions in the Middle East. However, prices recovered and are now mixed.
The fundamentals in the short term are offsetting.
INTEREST RATE MARKET FUTURES
In a flight to safety move futures were higher in the overnight trade in light of increasing tensions in the Middle East. Futures have retained most of their gains.
Yesterday Raphael Bostic of the Federal Reserve said U.S. inflation is too high, and we still have a ways to go on inflation. He said he does not think the Fed can reduce interest rates until towards the end of the year.
In addition, Neel Kashkari of the Federal Reserve said once inflation is headed back to 2.0% the Fed can then cut interest rates, but they may have to wait until 2025.
Austan Goolsbee of the Federal Reserve will speak at 9:30 central time.
Financial futures markets are predicting no change in the fed funds rate at the Federal Open Market Committee’s May, June and July meetings. However, there is a 69% probability of a rate reduction at the September 18 meeting.
I would not be surprised to see the probability of a fed funds rate cut at the September meeting diminishing as we get closer to that meeting.
The bearish influence of a Federal Reserve that is slow to pivot to accommodation may be offset by the possibility for a flight to quality flow of funds if geopolitical concerns intensify.
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