Today’s FOMC meeting and press conference by Chairman Powell thereafter, reiterated their plan to have three rate cuts of 25 BP each later this year. When, was left ambiguous. While there has been significant progress on the inflation front over the last year, recent CPI and PPI data are showing inflation re-accelerating. With the recent US$12/b increase in WTI crude (from early February) upcoming headline inflation may prove problematic for any Fed rate pivot. The Chairman said in his press conference “the data hasn’t really changed the overall story, which is that inflation is moving down gradually, on sometimes bumpy road”. US 10-year Treasury yields ended the day at 4.27% down from the high earlier in the week of 4.34% but above the early February rate of 3.87% due to the inflation problem. The market had been expecting that the Fed would make its first rate cut in June but if the inflation data remains hot then the pivot may not happen at that meeting. The problem then becomes the election cycle and historically the Fed has not wanted to upset the political apple cart during this tense time for the political elite. The challenge for the Fed is that they are navigating two risks. The first is that they ease too soon allowing inflation to re-ignite and then they face the mid-1970’s inflation challenge. The second is that they move too slowly and the economy falls from a ‘soft landing’ to a full on recession.

Mixed economic data in the US continues with some data showing a slowing economy but others indicating inflation reversings to the upside. This stagflation pivot is not what the bond and stock market want to see. So let’s go through the recent economic & political releases of significance.

• The National Association of Independent Business (NFIB) reported that their measure of the economy fell 0.5 points to 89.4 the sixth decline in the past seven months to a nine month low. Members reported rising unemployment and falling business optimism.
• PPI came in at up 0.6%, month over month in February or over 7% annualized. This was much hotter than the 0.3% expected. Excluding the rising energy and food prices, PPI still rose at an uncomfortable high of 0.4% in the month.
• February Retail Sales continued strong with a rise of 0.6% but the main contributor was the increase in sales for gasoline as the price rose. Excluding energy, it appears that the consumer is getting tapped out and spending on non-essentials is losing steam and was flat in the month.
• The NY Fed noted last week that credit card and auto loans delinquencies have ticked up to the highest level in a decade, as consumer budgets are stretched and debt and interest payments have been the casualty of this squeeze. Families are feeling a significant strain that is shaping spending choices for middle and lower income families.
• China is seeing a pick up in exports and manufacturing, but consumer demand remains weak. Industrial output rose 7% in the first two months of the year and fixed asset investment rose by 4.2%, according to the China National Bureau of Statistics. This helped to lift energy prices after they were released.

On the wars front:

• Ukraine used more drones to attack critical Russian energy infrastructure (three key refineries in western Russia). This may impact Russia’s exports by over 600,000 b/d according to recent reports and has lifted crude prices. Ukraine had found a new way to deter Russia and plans on sending increasing swarms of drones into Russia to sway the Russian people against Putin’s misadventure.
• Newsweek reports that Ukraine special forces have attempted to attack a Russian nuclear plant in the border region of Kursk with at least five kamikaze drones and one S-200 missile. To date Ukraine has seen its nuclear facilities attacked by Russia and now it has done the same to Russia as the war is stalemated on the ground as Ukraine awaits more munitions from the west to reverse Russian land gains over the last few months.
• France’s President Macron is trying a two tier strategy to end the war in Ukraine. On one side he is asking for a ceasefire for the window of the Paris Olympics and on the other hand has threatened to send French troops into Ukraine (along with other EU NATO countries) with a force goal of 60,000 to fight Russia and free eastern Ukraine. President Putin has responded that if this occurs then WWIII will have started and the nuclear option is on the table. Hopefully this is just posturing as NATO troops in their uniforms would be a serious escalation. Having special forces in the Ukrainian foreign forces is one thing but in NATO uniforms would be what Russia has surmised as the goal of Europe all along. Russia reports that they have picked up transmissions in English and French on the battlefield.
• Yemen’s Houthis have received hypersonic missiles from Iran and have fired three in the Red Sea over the last week. Iran’s support continues the challenge for international shipping in the region and ties up warships of many nations.