Inflation data mixed for Indices, markets calm, Regional Bank drama continues

Inflation and jobs data were positive for the major Indices, but risks are still all too evident. Regional bank worries are again the spotlight on Wall Street, pressuring stock prices after PacWest Bancorp reported a drop in deposits last week that sent its stock down 24%. We are seeing two equity markets: the tech-heavy NASDAQ hit an eight-month high yesterday, while the KBW Regional Bank Index is down 50% in the year-to-date, with no sign that the sell-off is over.

Today’s economic data doesn’t support rate cuts

Producer Price Index (PPI) inflation numbers this morning were good, suggesting significant easing of inflationary pressures at the wholesale level, which to some extent reflects the general weakness in commodity prices used to produce goods – this is good news for inflation, but as wages impact consumer price inflation (and they are still robust), it’s not the whole story.

Unemployment data also reported today was pretty tepid, and not yet where the Fed wants to see them to tame wage inflation (rising), but they are slowly trending in that direction. Are these numbers trending in that direction fast enough to suggest a pivot in policy that would result in rate cuts? Probably not yet, and maybe not yet for the rest of this year, but we’ll see.

Recent data suggests that wage inflation remains a significant problem, with more job openings than available workers to fill them, although things have started to soften. The Federal Reserve may pause its rate hikes, but it made it clear that it does not want to error by reducing rates too soon, preferring to err on the cautious side and not cutting rates.

Political uncertainty continues to cast a cloud over the markets

Financial markets typically ignore political risks, until they can’t. Worryingly, the list is getting longer. Geopolitical risks are trending higher in both the Black Sea and in the Taiwan Strait. Commodity traders are also concerned about the state of the domestic and global economy. In the US, regional bank worries top the list. China's stumbling economy raises global concerns, with China being the world's largest importer of commodities.

Traders also worry about whether Republicans and Democrats can get along with each other long enough to deal with the debt crisis, agreeing a near-term debt ceiling and perhaps crafting a longer-term solution to rapidly rising debt which, with higher rates, could consume the federal budget. These uncertainties to contribute to ongoing market volatility in the weeks and months ahead, with the national debt becoming a much bigger market factor in the next several years as annual interest obligations race toward $1 trillion per year.

Indices hit by Regional Bank woes (again), Techs shine

• At the time of writing, the broad S&P 500 and Russell 2000 indices were down by 0.3% and 1.2%, while the tech heavy NASDAQ was up 0.1%
• The KBW Regional Bank Index fell 1.0% morning, continuing their downward track after bad news from PacWest Bancorp
• The VIX, Wall Street’s fear index, rose marginally to 17.5, the low end of a 3-year range
• The dollar index edged up 0.6% to 101.9, sticking above its long-term support level, with and Dollar/Sterling and Euro/Dollar also off by 0.9% and 0.6% respectively
• Yields on 2- and 10-year Treasuries fell on PPI inflation news to 3.87% and 3.39%, respectively

Commodities weak, Gold holds above 2K mark

• Gold prices maintained the 2K level, but fell 0.7% to $2,023 per ounce
• Crude oil prices fell 1.2% to $71.7 per barrel
• Grain and oilseed prices were mostly lower this morning

Producer Price Index (PPI) inflation moderates

• April’s headline US PPI rose 2.3% year-on-year in April, below analyst expectations of 2.5% and below the 2.7% posted the previous month
• PPI rose just 0.2% month-on-month in April, below the expected 0.3%, compared to the deflationary contraction of 0.5% in March
• Core PPI, excluding more volatile food and energy sectors, rose 3.2% year-on-year in April, below analyst expectations of 3.3%, and down from 3.4% the previous year
• Core PPI rose 0.2% month-on-month in April, matching analyst expectations, but above the 0.1% contraction seen in March

Unemployment claims yet to show weaker jobs market

• First-time claims for unemployment benefits in the US rose to 264,00 in the week ending May 6, above analyst expectations of 245,00 claims, and up from 242,000 the previous week
• The four-week moving average rose to 245,250 claims
• Continuing claims for the week ending April 29 rose 12,000 to 1.813 million, still below the four-week moving average of 1.830 million

China grapples with deflation

• China’s annual CPI rose just 0.1% in April, down from 0.7% in March – and yes, those are year-on-year numbers!
• China’s annual PPI ex factories fell 3.6% in April, down from a decline of 2.5% in March –  the seventh consecutive month for declining prices at the producer level, reflecting soft demand
• Chinese consumer spending is not strong enough to support the economy amid sluggish export demand for products
• China has seen stronger demand for services, but demand for goods remains soft
• All of his argues for fiscal stimulus, but it’s difficult for China to be in stimulus mode when much of the rest of the world is in a tightening mode

Analysis by Arlan Suderman, Chief Commodities Economist