With financial markets remaining ultra-sensitive to the interest rate outlook, inflation readings will again be a focal point for investors this week. The upcoming US Core PCE reading (due this Friday) stands out as a potential candidate for influencing the rate-cut time horizon expected from the FOMC. If the February Core PCE figure comes in at 0.3% as expected (which would be below the 0.4% reading for January), this would keep alive hopes for some rate-cutting activity from the Fed come June. Though an upside surprise in the data cannot be ruled out given the stronger CPI and PPI results released already this month.
Australia will also get a look at its February CPI data today. Last week, the RBA adopted a softer stance regarding the rate outlook at its March meeting (while holding rates steady at 4.35%), and if February’s CPI data takes a step back from the prior month this will justify the dovish turn in tone from the central bank.
In FX markets, the yen continues its struggles in the aftermath of the BOJ policy shift away from negative rates. The problem for the yen and by extension for Japanese authorities is that despite the BOJ making waves by shifting its monetary policy, when all is said and done the yield available in Japan is still close to zero and as such the yen still retains its mantle as the favourite funding currency in the ‘carry trade’ scenario. The result is that the yen is trading close to its lows for the year against the USD, having depreciated nearly 7.5% versus the greenback thus far in 2024.
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Oil is having an extended stay above the $80 per barrel level courtesy of supply concerns. Attacks on Russian refineries have left energy markets feeling more worried about how supply will be impacted in the short to medium term, which is underpinning the price action for the WTI and Brent oil contracts. In addition to the supply side concerns, market participants are also looking ahead to potential interest rate cuts from major economies in the second half of the year which may provide a boost to the demand picture for oil. These supply and demand side dynamics, while they remain in play, are likely to maintain upside pressure on the oil market in the near term.
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Elsewhere in commodities, gold continues to consolidate in the $2150-$2200 range ahead of Friday’s US Core PCE release. A mild dip in the US Dollar Index overnight allowed gold to edge higher, although moves of larger significance could be reserved for after we see how the Core PCE data fared during February. The near-term bias for gold remains to the upside given support from central bank buying of the precious metal and the expectation of looser monetary conditions to come from the likes of the FOMC and ECB.
