Fed Preview – Higher for Longer continues
This Wednesday the Fed is likely to reiterate its cautious stance on rate cuts, amid stronger inflation and activity data in all Q1. Last week’s core PCE inflation beat expectations, fuelling a further selloff in US rates and pushing the 2Y Treasury yield to 5%, the highest level since November. Financial conditions are tightening again but are still some 100bps easier than at the peak last October, according to Goldman Sachs’ FCI. Without new projections, Powell’s guidance for easing prospects this year will be closely watched. Markets now think June cuts are fully off the table, priced at 0%, and are increasingly sceptical that the Fed can cut at all this year, with only 33bp of cuts implied by December. This Friday’s Nonfarm Payrolls print, currently seen at 250k by consensus estimates, will be key to shape the narrative into May. Any downside surprises in this very volatile number could shift the picture quite quickly, and last week’s PMI report already anticipated a weakening labour market.

Eurozone Inflation – Divergence on track?
Tuesday’s Eurozone HICP is expected to stay unchanged at 2.4% YoY, but core is likely to fall by -20bp to 2.7%. Higher energy prices are likely to support headline inflation, but services inflation may fall amid lower package holiday and accommodation prices. Services prices remain a headache for the ECB, having been unchanged at 4% for the past five months. Goods disinflation is likely to continue, as indicated by last week’s still falling PMI output prices. Eurozone sentiment across surveys has generally been improving, amid expectations for rate cuts and falling inflation. Yet, the ECB is turning more cautious about cuts after June. Markets assign 80% odds of a June cut, but only 35% odds for a subsequent cut in July. We think the ECB has more room to cut than the Fed this year but are cautious given the ongoing repricing of US rates.

Algebris Investments’ Global Credit Team