5 Things You Need to Know to Start Your Day: Americas

Good morning. The impact of hot US inflation data continues to ripple through markets as traders push back Fed rate-cut bets and bond trader [View in browser]( [Bloomberg]( Good morning. The impact of hot US inflation data continues to ripple through markets as traders push back Fed rate-cut bets and bond traders position for the possibility of no reductions at all. Here’s what’s moving markets. — [Sam Unsted]( Want to receive this newsletter in Spanish? [Sign up to get the Five Things: Spanish Edition newsletter](. Inflation reverberation Hot US inflation data is continuing to reverberate through global markets. Treasuries and US stock [are calm]( after slumping following the data on Wednesday. But bonds in Europe and particularly in the UK have been rattled as traders pare back bets on when and how deeply their central banks will cut interest rates. That echoes what happened with wagers on the Federal Reserve’s path, with markets now pricing less than two quarter-point cuts for 2024. The European Central Bank is [making its decision]( later on Thursday. Fading rate-cut hopes For the Fed, the first rate cut is now only fully-priced for November, a turn that [seemed unthinkable]( at the start of the year when the consensus was that the US central bank would reduce rates by 150 basis points. Traders are starting to doubt whether Fed Chair Jerome Powell [will be able to engineer a soft landing]( for the economy. The Fed itself, in the minutes of its latest meeting, “generally favored” slowing the pace of shrinking its asset portfolio, while [“almost all” officials]( said it would be appropriate to cut rates “at some point” this year. Bond trader bets Bond traders, meanwhile, are readying themselves for a [scenario where the Fed doesn’t cut rates at all]( this year and preparing for yields on 10-year US Treasuries to surpass 5%. Schroders is shorting US bonds across a range of maturities, while Pimco said it anticipates a more gradual easing cycle in the US than in other developed markets, with a “non-negligible” chance of no cuts at all. The team at Jefferies, however, think that US stocks [can continue rallying]( with or without lower rates, though other strategists said that will be even more dependent on [how strong earnings are](. China stalls Chinese inflation [stalled in March](, barely increasing from a year prior and with a continued slump in industrial prices, all of which underscores the deflationary pressures facing the country’s economic recovery. Goldman Sachs and Morgan Stanley, however, have [raised their outlook for China’s economic growth]( this year, driven by an improvement in factory activity and exports. Coming Up… The tumult surrounding bets on Fed interest-rate cuts could get more fuel with a quartet of officials scheduled to speak, including John Williams, Thomas Barkin, Susan Collins and Raphael Bostic. Producer price and jobs data is also on the agenda. The earnings calendar is still quiet ahead of tomorrow’s storm, when US banks will fire the starting pistol for the season. What We’ve Been Reading This is what’s caught our eye over the past 24 hours. - US warning of an [imminent missile strike]( on Israel by Iran. - [Manhattan rental prices]( unexpectedly fall. - [Cocoa farmers]( being lured back by spiking prices. - The best bets for [Ivy League rejects](. - How Adobe is [building its AI model](. And finally, here's what Joe’s interested in this morning Yesterday we got the March CPI and it was disappointingly high. This comes after disappointments in both January and February. And since three makes a trend, there are serious concerns again that progress on getting back to the Fed's 2% target has either stalled or gone into reverse. In the meantime, expectations for a rate cut keep pushing back into the future, and there's questions about whether there will be any cuts at all in the near term, or perhaps whether the next rate move will be a hike. One of the things that was really encouraging about what we saw in the second half of 2023 was disinflation alongside labor market stability. It showed that in practice you can have price growth come down, without a substantial rise in the unemployment rate. But after this string of inflation data, there's probably going to be another round of people wondering whether the labor market needs to weaken more in order for inflation to get under control. As [Tim Duy of SGH Macro]( put it in a note to clients after the report, the "growth doesn't matter" narrative is faltering. In 2022, when we had the big surge, and the stock market weakness and aggressive rate hikes, the economy was arguably guilty until proven innocent. Positive data on growth and jobs were seen as problematic from an investor perspective, because that was seen as undercutting the Fed's agenda. Then things turned around in 2023, with good news being recognized for being good news again. I mentioned earlier that the labor market held strong in 2023, and it did. However on various first and second derivative measures it did come off the boil last summer. The Bloomberg Economics Labor Market Surprise Index -- which measure the degree to which the labor data is coming in ahead of or below economist projections -- peaked in early August and then decline sharply through the rest of the year. It never got negative, but it did become less positive. Since the beginning of December, however, it's been back on the rise and now is at elevated levels, with last Friday's Non-Farm Payrolls report showing surprising strength in job creation. Even with yesterday's decline (which really wasn't all that huge) the S&P 500 remains up over 8% this year. But the question is whether a 2022-like dynamic re-emerges where positive developments on the growth or labor side are seen as per se counterproductive for the Fed's objectives. Follow Bloomberg's Joe Weisenthal on X [@TheStalwart]( [Bloomberg Markets Wrap: The latest on what's moving global markets. Tap to read.]( Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. Before it’s here, it’s on the Bloomberg Terminal. Find out more about how the Terminal delivers information and analysis that financial professionals can’t find anywhere else. [Learn more](. 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