U.S. Indices ended higher on Tuesday following a session that saw plenty of two-way price action. The markets were ultimately boosted by a soft US CPI report quelling some recent US economic fears, although US growth concerns and tariff uncertainty continue to loom heavily in the background. Highlighting the slight reversal in risk sentiment yesterday, was the mega-cap sectors, Technology, Communication Services, and Consumer Discretionary, with NVDA (+6.4%) and TSLA (+7.6%) seeing heavy gains. Back to data, US CPI was cooler than expected across the board, although the headline was largely weighed on by a 4% plunge in airline fares, but it won’t feed through to the PCE. In reaction, markets saw a broad-based dovish reaction (Treasuries upside, Dollar downside), but both Treasuries and the Dollar pared initial moves as focus swiftly went back to global trade, rather than CPI metrics as it was released a day after blanket tariffs imposed by the US. In FX, the Canadian Dollar outperformed in wake of the Bank of Canada, whereby the bank lowered rates by 25bps, as widely expected, with Governor Macklem noting the BoC will be “proceeding carefully” when it comes to the policy path. Meanwhile, the Japanese Yen lagged amid yield differentials. In the energy space, crude saw gains as it was buoyed by a turnaround in recent risk sentiment as cooler-than-expected US CPI supported as well as bullish inventory data, although the aforementioned macro woes remain ever-present. U.S. CPI for February was cooler than expected across the board. Headline CPI M/M rose 0.2% or 0.216% unrounded (exp. 0.3%, prev. 0.5%), while Y/Y printed 2.8% (exp. 2.9%, prev. 3.0%). Core M/M came in at 0.2% or 0.227% unrounded, vs. the expected 0.3% and prior 0.4%. Core Y/Y printed 3.1% (exp. 3.2%, prev. 3.3%). The headline was largely weighed on by a 4.0% plunge in airline fares, which Pantheon Macroeconomics note subtracted 0.05pp, but also noted it will not feed through to the PCE report. On airline fares, PM notes they recently decoupled from underlying costs amid strong demand late last year, which unwound in February and PM doubts fares will rebound in March. The recent fall in consumers’ confidence points to more cautious spending as well as a lot of airlines (JBU, AAL, LUV, UAL, DAL) cut guidance this week. Overall, PM still believes that core CPI inflation will be broadly unchanged from February’s 3.1% rate at the end of this year, as the boost from tariffs will be broadly offset by a further decline in services inflation. As such, should enable the Fed to focus on supporting the ailing economy, easing by about 75bps over 2025. Ahead of PCE, Pantheon Macroeconomics provisionally forecasts that the core PCE deflator rose by 0.32% in February. Note, PPI which has a slew of inputs into PCE is due on Thursday. Overall, the US CPI report provided a brief bit of solace for traders amid the glum macro picture at the moment, but the focus quickly switched back to more important issues, such as US growth concerns and tariff uncertainty. The Bank of Cnada cut rates by 25bps in line with expectations, taking the target for the overnight rate to 2.75%, while Governor Macklem stated they will proceed carefully with any further changes to their policy rate, given the need to assess both upward pressures of inflation from higher costs and the downward pressures from weaker demand. The statement largely focused on tariffs. It said that heightened trade tensions and tariffs imposed by the US will likely slow the pace of economic activity and increase inflationary pressures in Canada, noting short-term inflation expectations have risen. It also noted how monetary policy cannot offset the impact of a trade war, but it must ensure that higher prices do not lead to ongoing inflation. The Bank acknowledged that recent surveys suggest a sharp drop in consumer confidence and a slowdown in business spending as companies postpone or cancel investments. However, it also noted the negative impact of slowing domestic demand has been partially offset by a surge in exports in advance of tariffs being imposed. The BoC warned Q1 ’25 growth will slow and there are warning signs that heightened trade tensions could disrupt the recovery in the labour market. It noted how wage growth has shown signs of moderation and they are closely watching inflation expectations. Overall, the BoC is in wait-and-see mode to see how the trade war plays out and how it will affect the Canadian economy with both upside and downside risks to inflation as a result of tariffs. In the Q&A, Governor Macklem also acknowledged the estimate of the neutral rate is largely centered around 2.75%, implying the BoC is now at the neutral level. Looking ahead, the next rate cut is not fully priced until June (was at July pre-BoC), with 43bps of easing priced throughout year-end, which fully prices one further rate cut, with a 72% probability of another (vs being fully priced pre-BoC). Elsewhere both Oil and Gold rose on Wednesday by 0.8% and 0.7% respectively.
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