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Bad times for US doves

Written by Thomas GIUDICI | Apr 17, 2024 8:44:42 AM

Again. After the employment report two weeks ago, the publication of the American inflation report for the month of March also came out beyond expectations. It thus probably seals the hopes of the most dovish on the number of rate cuts to expect from the Fed, the market now only anticipating two by the end of the year (compared to 7 in December). From a strict macroeconomic point of view, and excluding major exogenous shocks, the Fed can clearly afford the luxury of waiting to make a first rate cut... and for a long time. However, between the presidential election at the beginning of November and the problem of the American budget deficit (for the record, the US Treasury finances itself mainly in the short term and the level of key rates has a direct impact on the cost of interest on the debt), the Fed will therefore have a lot to do to try to remain independent or, at least, to try to pass as such and avoid mixing politics with its monetary decisions. The task does not look easy and the pressure is felt. For Joe Biden, in fact, the latest inflation figures at most justify postponing the first decline by one month. Response from the shepherd to the shepherdess (from Trump in the text): “INFLATION is BACK – and RANGE!” The Fed will never be able to credibly lower interest rates because it wants to protect the worst president in US history! ".

In detail, overall and core inflation increased by 0.4% over the month, both above expectations, bringing annual increases to 3.5% (compared to 3.2% in February and 3.4% expected) and 3.8% respectively. (compared to 3.7% expected and in balance compared to the previous month). The hitherto disinflationary elements (oil and goods) have exhausted this downward capacity and are gradually becoming more or less volatile contributors again while inflation in services is not decreasing. While the last minutes of the FOMC (that of February) reveal great caution among its members, it is not certain that this publication provides “confidence” in the return of inflation to its target.

On the ECB side, however, no surprises. Monetary policy remained unchanged and the likelihood of a rate cut in June is growing. With the rise in wages easing (one of the only points of attention for the ECB), nothing normally stands in the way except the desire to act before the Fed. The calendar and macroeconomic dynamics should push Christine Lagarde to do so, she who repeated that the ECB was “data dependent and not Fed dependent”. However, according to Reuters, some members of the European institution would like to be more cautious in view of the rebound in American inflation. Courage, we must act!

Finally, we will end this post with geopolitical news with elements of the weekend in the Middle East. If Iran's attack on Israel is historic and marks a major turning point in the latent conflict between the two countries, it seems more window dressing than anything else, with all stakeholders having apparently been warned in advance. The real question, and therefore the risk for the markets, lies more in the response that Israel will give to this unprecedented attack while its historic American ally is campaigning for a contained response in order to avoid the conflagration of the region.