Evelyn Reynolds

Christine Lagarde, president of the European Central Bank (ECB), at a rates decision news conference in Frankfurt, Germany, on Thursday, March 7, 2024. 
Bloomberg | Bloomberg | Getty Images

The European Central Bank on Thursday held interest rates steady for a fifth straight meeting, as anticipation builds for rate cuts in June.
“If the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation and the strength of monetary policy transmission were to further increase its confidence that inflation is converging to the target in a sustained manner, it would be appropriate to reduce the current level of monetary policy restriction,” it said in a statement.

In a press conference following the announcement, ECB President Christine Lagarde said this “important” new sentence was a “loud and clear indication” of the bank’s current sentiment.
The ECB made no direct reference to loosening monetary policy in its previous communiques.
The central bank for the 20 countries that share the euro currency hiked its key rate to a record 4% in September. It has left this rate unchanged at every gathering since.
Policymakers and economists have zeroed in on June as the month when rates could start to be reduced, after the ECB trimmed its medium-term inflation forecast. Price rises in the euro zone have since cooled more than expected in March.
June will also be the first month when policymakers will have a full set of data on first quarter wage negotiations — an area of concern for potential inflationary effects.

The ECB on Thursday said incoming information had “broadly confirmed” its medium-term outlook, with falling inflation led by lower food and goods.
Market pricing suggests a 25-basis-point cut in June, according to LSEG data.
“For a while now, the ECB has essentially pre-committed to a June cut. There is a high bar for this not to be delivered. But there is a wide range of possible outcomes in the subsequent months, depending on further progress with disinflation. So far, the data is moving in the doves’ favour,” said Hussain Mehdi, director of investment strategy at HSBC Asset Management, in a note.

In the U.S., expectations for a summer rate cut from the Federal Reserve were significantly curtailed by inflation data coming in higher than forecast on Wednesday.
This has raised questions over how European central banks will respond to developments in the world’s largest economy.
Asked Thursday about whether the U.S. consumer price index figures could impact the ECB’s rate cut trajectory, Lagarde said: “Obviously, anything that happens matters to us and will in due course be embedded in the projection that will be prepared and released in June. The United States is a very large market, a very sizeable economy, a major financial sector as well.”
She declined to specify whether the euro’s exchange rate against the U.S. dollar would factor into policymaking.
But in comments reported by Reuters that proceeded the ECB’s decision, Sweden’s central bank Deputy Governor Per Jansson on Thursday said that if the Fed rules out rate cuts in 2024, it could present a “problem” for both the Riksbank and the ECB.
In the case of the Riksbank, this would be due to the weakening of the Swedish krona fueling inflation, Jansson said in a speech.
European data continues to move toward the 2% inflation target, keeping the ECB on track for a June cut – but the pace and extent of further cuts this year “could be more sensitive to U.S. data and Fed policy,” Andrew Benito, chief European economist at Eisler Capital, told CNBC’s Silvia Amaro ahead of the rate announcement. More

The producer price index, a measure of inflation at the wholesale level, increased 0.2% for the month, less than the 0.3% estimate from the Dow Jones consensus.
However, on a 12-month basis, PPI rose 2.1%, the biggest gain since April 2023, indicating pipeline pressures that could keep inflation elevated.
initial filings for jobless benefits fell to 211,000, a decline of 11,000 from the previous week’s upwardly revised level and below the 217,000 estimate.

A measure of wholesale prices increased less than expected in March, providing some potential relief from worries that inflation will hold higher for longer than many economists had expected.
The producer price index increased 0.2% for the month, less than the 0.3% estimate from the Dow Jones consensus and not as much as the 0.6% increase in February, according to a release Thursday from the Labor Department’s Bureau of Labor Statistics.

However, on a 12-month basis, PPI rose 2.1%, the biggest gain since April 2023, indicating pipeline pressures that could keep inflation elevated.
Excluding food and energy, core PPI also rose 0.2%, meeting expectations. Excluding trade services from the core level, the increase was 0.2% monthly but 2.8% from a year ago.
The release comes a day after the BLS reported that consumer prices again rose more than expected in March, raising concerns that the Federal Reserve will be unable to lower interest rates anytime soon.
On the producer price side, March’s gain was pushed by services, which saw a 0.3% increase on the month. Within that category, the index for securities brokerage and other investment-related fees jumped 3.1%.
Conversely, goods prices decreased 0.1%, flipping a 1.2% increase in February. Final demand costs for energy, which has been on the rise lately, actually fell 1.6% on the month. However, wholesale prices for final demand food and goods less food and energy climbed 0.8% and 0.1% respectively.

Though prices have been rising at the pump, the final demand index for gasoline fell 3.6%. That contrasted with the consumer price index, which showed gasoline up 1.7% on the month.
Markets showed little reaction to the data, with futures tied to major stock indexes slightly higher though Treasury yields declined.
In other economic news Thursday, initial filings for jobless benefits fell to 211,000, a decline of 11,000 from the previous week’s upwardly revised level and below the 217,000 estimate from Dow Jones.
Continuing claims, which run a week behind, increased to 1.82 million, up 28,000 for the period, according to the Labor Department release.
The economic data points are being watched closely as Federal Reserve contemplates its next moves on monetary policy.
Wednesday’s CPI release jolted markets, which had been anticipating an aggressive series of interest rate cuts this year. The report showed annual inflation running at 3.5%, well above the Fed’s 2% target.
The market now is pricing in the possibility of just two cuts this year, likely not starting until September, according to CME Group data. More

Higher-than-expected inflation in March helped verify worries that inflation is proving stickier than thought.
Following the CPI report, markets switched from pricing in a June rate cut to September, and lowered the outlook this year to two reductions from three.
Markets didn’t like the CPI news and sold off aggressively Wednesday.

Traders work on the floor of the New York Stock Exchange during afternoon trading on April 09, 2024 in New York City.
Michael M. Santiago | Getty Images

As recently as January, investors had high hopes that the Federal Reserve was about to embark on a rate-cutting campaign that would reverse some of the most aggressive policy tightening in decades.
Three months of inflation data have brought those expectations back down to earth.

March’s consumer price index report Wednesday helped verify worries that inflation is proving stickier than thought, giving credence to caution from Fed policymakers and finally dashing the market’s hopes that the central bank would be approving as many as seven rate cuts this year.
“The math suggests it’s going to be hard near term to get inflation down to the Fed’s target,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. “Not that you’ve put a pin in inflation getting to the Fed’s target, but it’s not happening imminently.”
There was little good news to come out of the Labor Department’s CPI report.
Both the all-items and ex-food and energy readings were higher than the market consensus on both a monthly and annual basis, putting the rate of inflation well above the Fed’s target. Headline CPI rose 0.4% on the month and 3.5% from a year ago, ahead of the central bank’s 2% goal.

Danger beneath the surface

But other danger signs beyond the headline numbers emerged.

Services prices, excluding energy, jumped 0.5% and were up 5.4% from a year ago. A relatively new computation the markets are following which takes core services and subtracts out housing — it has come to be known as “supercore” and is watched closely by the Fed — surged at an annualized pace of 7.2% and rose 8.2% on a three-month annualized basis.
There’s also another risk in that “base effects,” or comparisons to previous periods, will make inflation look even worse as energy prices in particular are rising after falling around the same time last year.

All of that leaves the Fed in a holding position and the markets worried about the possibility of no cuts this year.
The CME Group’s FedWatch tool, which computes rate-cut probabilities as indicated by futures market pricing, moved dramatically following the CPI release. Traders now see just a slim chance of a cut at the June meeting, which previously had been favored. They have also pushed out the first reduction to September, and now expect only two cuts by the end of the year. Traders even priced in a 2% probability of no cuts in 2024.
“Today’s disappointing CPI report makes the Fed’s job more difficult,” said Phillip Neuhart, director of market and economic research at First Citizens Bank Wealth. “The data does not completely remove the possibility of Fed action this year, but it certainly lessens the chances the Fed is cutting the overnight rate in the next couple months.”

CNBC news on inflation

Market reaction

Markets, of course, didn’t like the CPI news and sold off aggressively Wednesday morning. The Dow Jones Industrial Average dropped by more than 1%, and Treasury yields burst higher. The 2-year Treasury note, which is especially sensitive to Fed rate moves, jumped to 4.93%, an increase of nearly 0.2 percentage point.
There could yet be good news ahead for inflation. Factors such as rising productivity and industrial capacity, along with slower money creation and easing wages, could take the pressure off somewhat, according to Joseph LaVorgna, chief economist at SMBC Nikko Securities.
However, “inflation will remain higher than what is necessary to warrant Fed easing,” he added. “In this regard, Fed cuts will be pushed out to into the second half of the year and are likely to fall only 50 basis points [0.5 percentage point] with risks being tilted in the direction of even less easing.”
In some respects, the market has only itself to blame.
The pricing in of seven rate cuts earlier this year was completely at odds with indications from Fed officials. However, when policymakers in December raised their “dot plot” indicator to three rate cuts from two projected in September, it set off a Wall Street frenzy.
“The market was just way over its skis in that assumption. That made no sense based on the data,” Schwab’s Sonders said.
Still, she thinks if the economy stays strong — GDP is projected to grow at a 2.5% rate in the first quarter, according to the Atlanta Fed — the knee-jerk reaction to Wednesday’s data could pass.
“If the economy hangs in there, I think the market is, for the most part, OK,” Sonders said.
Correction: The markets are worried about the possibility of no cuts this year. An earlier version misstated the worries.

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The consumer price index, a key inflation gage, rose 3.5% in March, higher than expectations and marking an acceleration for inflation.
Shelter and energy costs drove the increase on the all-items index. Energy rose 1.1% after increasing 2.3% in February, while shelter costs were higher by 0.4% on the month and up 5.7% from a year ago.
Following the report, traders pushed the first expected rate cut out to September, according to CME Group calculations.

The consumer price index accelerated at a faster than expected pace in March, pushing inflation higher and likely dashing hopes that Federal Reserve will be able to cut interest rates anytime soon.
The CPI, a broad measure of goods and services costs across the economy, rose 0.4% for the month, putting the 12-month inflation rate at 3.5%, or 0.3 percentage point higher than in February, the Labor Department’s Bureau of Labor Statistics reported Wednesday. Economists surveyed by Dow Jones had been looking for a 0.3% gain and a 3.4% year-over-year level.

Excluding volatile food and energy components, core CPI also accelerated 0.4% on a monthly basis while rising 3.8% from a year ago, compared to respective estimates for 0.3% and 3.7%.

Stock market futures slumped following the report while Treasury yields spiked higher.
Shelter and energy costs drove the increase on the all-items index.
Energy rose 1.1% after increasing 2.3% in February, while shelter costs, which make up about one-third of the weighting in the CPI, were higher by 0.4% on the month and up 5.7% from a year ago. Expectations for shelter-related costs to decelerate through the year have been central to the Fed’s thesis that inflation will cool enough to allow for interest rate cuts.
Food prices increased just 0.1% on the month and were up 2.2% on a year-over-year basis. There were some big gains within the food category, however.

The measure for meat, fish, poultry and eggs climbed 0.9%, pushed by a 4.6% jump in egg prices. Butter fell 5% and cereal and bakery products declined by 0.9%. Food away from home increased 0.3%.
Elsewhere, used vehicle prices declined 1.1% and medical care services prices rose 0.6%.

The report comes with markets on edge and Fed officials expressing caution about the near-term direction for monetary policy. Central bank policymakers have repeatedly called for patience on cutting rates, saying they have not seen enough evidence that inflation is on a solid path back to their 2% annual goal. The March report likely confirmed worries that inflation is stickier than expected.
Markets had expected the Fed to start cutting interest rates in June with three reductions in total expected this year, but that shifted dramatically following the release. Traders in the fed funds futures market pushed expectations for the first cut out to September, according to CME Group calculations.
“”There’s not much you can point to that this is going to result in a shift away from the hawkish bent” from Fed officials, said Liz Ann Sonders, chief investment strategist at Charles Schwab. “June to me is definitely off the table.”
The Fed also expects services inflation to ease through the year, but that has shown to be stubborn as well. Excluding energy, the services index increased 0.5% in March and was at a 5.4% annual rate, inconsistent with the Fed’s target.
“This marks the third consecutive strong reading and means that the stalled disinflationary narrative can no longer be called a blip,” said Seema Shah, chief global strategist at Principal Asset Management. “In fact, even if inflation were to cool next month to a more comfortable reading, there is likely sufficient caution within the Fed now to mean that a July cut may also be a stretch, by which point the US election will begin to intrude with Fed decision making.”
Later Wednesday, the Fed will release minutes from its March meeting, providing more insight into where officials stand on monetary policy.
Multiple Fed officials in recent days have expressed skepticism about lowering rates. Atlanta Fed President Raphael Bostic told CNBC that he expects just one cut this year, likely not coming until the fourth quarter. Governor Michelle Bowman said an increase may even be necessary if the data do not cooperate. More

The World Trade Organization on Wednesday said that it expects global trade volumes to increase by 2.6% in 2024 following a 1.2% decline in 2023.
WTO chief economist Ralph Ossa told CNBC that rebound was due to a fall in inflation and an expected normalization of monetary policy.
In a report, the WTO warned that geopolitical tensions continue to pose a significant risk to its outlook as signs of trade fragmentation rise.

Container ships from international trunk lines, including those from Europe, Africa, India, Pakistan, and Southeast Asia, are loading and unloading containers at the container terminal of the Qianwan Port Area of Qingdao Port in Qingdao, China, on April 4, 2024. 
Nurphoto | Getty Images

The World Trade Organization on Wednesday said that it expects global trade to rebound gradually this year, before rising further in 2025, as the impacts of higher inflation fall into the rearview mirror.
In its latest “Global Trade Outlook and Statistics” report, the WTO forecast that total global trade volumes will increase by 2.6% in 2024, and by a further 3.3% in 2025. It follows a larger-than-expected 1.2% decline in 2023, as inflationary pressures and higher interest rates weighed on international trade.

“The reason for this pickup is basically the normalization of inflation and also the normalization of monetary policy, which has been a drag on trade in 2023,” the WTO’s chief economist Ralph Ossa told CNBC’s Silvia Amaro.
The trade rebound is expected to be “broad-based,” including across Europe, which experienced some of the deepest falls in trade volumes last year as a result of geopolitical tensions and the energy crisis caused by Russia’s full-scale invasion of Ukraine.
“Europe was really weighing on international trade in 2023, and we don’t see that being the case anymore,” Ossa said.

Geopolitical risks remain

Overall, world trade has been “remarkably resilient” over recent years, rising above its pre-Covid-19 pandemic peak in late 2023, the WTO report concluded. However, the organization warned that geopolitical tensions could still pose a risk to its outlook.
In particular, the ongoing war between Israel and Palestinian militant group Hamas could cause major trade disruptions, should it spill over into energy markets, Ossa said.

The economist also pointed to signs of global trade “fragmentation” along geopolitical lines.
The WTO report divided the global economy into two “hypothetical geopolitical blocks” based on U.N. voting patterns and found that trade growth between the blocks was slower than within them. The U.S. and U.K. for instance, have typically taken similar positions in recent U.N. votes on the Russia-Ukraine conflict, while China and South Africa, on the other hand, have taken opposite views.
That fragmentation was especially notable between the world’s two largest economies, the U.S. and China.
“We’ve seen that trade growth between the United States and China was 30% slower than trade growth between these countries and other countries,” Ossa said, referring to the period since 2018, when trade tensions initially arose.
“That doesn’t mean that they are not still trading a lot, but their trade shares are increasingly moving away from these relationships.”
Trade tensions between the U.S. and China resurfaced this week, when U.S. Treasury Secretary Janet Yellen said she would not rule out possible tariffs on Beijing, if it is found to be engaging in unfair trade practices. The calls for a tougher stance on China were echoed on Tuesday by European Commission chief Ursula von der Leyen.
The spat centers on claims that China is “dumping” subsidized green technology goods into international markets, effectively undercutting domestic producers. Beijing denies the claims.
The WTO report does not detail China-specific trade forecasts, however it expects a 3.4% aggregate increase in Asia exports in both 2024 and 2025.
“That doesn’t mean that, in particular sectors, we couldn’t see or we don’t expect to see any surges,” Ossa said. More

The consumer price index will be released Wednesday morning and is expected to register increases of 0.3% both for the all-items measure as well as core.
On a year-over-year basis that would put respective inflation rates at 3.4% and 3.7%.
Markets have grown nervous about the state of inflation and how it will affect Fed policy.

Gas prices are displayed at a gas station on March 12, 2024 in Chicago, Illinois. 
Scott Olson | Getty Images

A closely watched Labor Department report due Wednesday is expected to show that not much progress is being made in the battle to bring down inflation.
If so, that would be bad news for consumers, market participants and Federal Reserve officials, who are hoping price increases slow enough so that they can start gradually cutting interest rates later this year.

The consumer price index, which measures costs for a wide-ranging basket of goods and services across the $27.4 trillion U.S. economy, is expected to register increases of 0.3% both for the all-items measure as well as the core yardstick that excludes volatile food and energy.
On a 12-month basis that would put the inflation rates at 3.4% and 3.7%, respectively, a 0.2 percentage point increase in the headline rate from February, just a 0.1 percentage point decrease for the core rate, and both still a far cry from the central bank’s 2% target.
“We’re not headed there fast enough or convincing enough, and I think that’s what this report is going to show,” said Dan North, senior economist at Allianz Trade North America.
The report will be released at 8:30 a.m. ET.

Progress, but not enough

North said he expects Fed officials to view the report pretty much the same way, backing up comments they’ve been making for weeks that they need more evidence that inflation is convincingly on its way back to 2% before rate cuts can happen.

“Moving convincingly toward 2% doesn’t just mean hitting 2% for one month. It means hitting 2% or less for months and months in a row,” North said. “We’re a long way from that, and that’s probably what’s going to show tomorrow as well.”
To be sure, inflation has come down dramatically from its peak above 9% in June 2022. The Fed enacted 11 interest rate hikes form March 2022 to July 2023 totaling 5.25 percentage points for its benchmark overnight borrowing rate known as the federal funds rate.
But progress has been slow in the past several months. In fact, headline CPI has barely budged since the central bank stopped hiking, though core, which policymakers consider a better barometer of longer-term trends, has fallen about a percentage point.

While the Fed watches the CPI and other indicators, it focuses most on the Commerce Department’s personal consumption expenditures index, sometimes referred to as the PCE deflator. That showed headline inflation running at 2.5% and the core rate at 2.8% in February.
For their part, markets have grown nervous about the state of inflation and how it will affect rate policy. After scoring big gains to start the year, stocks have backed off over the past week or so, which have seen sharp swings as investors tried to make sense of the conflicting signals.
Earlier this year, traders in the fed funds futures market were pricing in the likelihood that the central bank would start reducing rates in March and continue for as many as seven cuts before the end of 2024. The latest pricing indicates that the cuts won’t start until at least June and not total more than three, assuming quarter-percentage point increments, according to the CME Group’s FedWatch calculations.
“I don’t see a whole lot here that is going to move things magically the way they want to go,” North said.

What to watch

There will be a few key areas to watch in Wednesday’s report.
Beyond the headline numbers, trends in items such as shelter, airfares and vehicle prices will be important. Those areas have been bellwethers during the current economic cycle, and moves either way could suggest longer-term trends.
Economists at Goldman Sachs expect outright declines across air travel-related items as well as vehicle sticker prices, and see smaller shelter cost increases, which make up about one-third of the CPI weighting. A New York Fed survey released Monday, however, showed a sharp uptick in expectations for rental costs over the next year, which is bad news for policymakers who frequently have cited decelerating housing costs as the cornerstone to their easing inflation thesis.
Similarly, the National Federation of Independent Business survey for March, released Tuesday, showed confidence among small businesses at its lowest level in more than 11 years, with owners citing inflation as their top concern.
“Inflation is cumulative, and that’s why prices still feel high,” North said. “People still can’t believe how high prices are.”
Gas prices also could play an important role in the CPI release after rising 3.8% in February. Though the gasoline index is relatively unchanged over the past two years, it’s still up more than 70% from April 2020 when the brief Covid-driven recession ended. Food is up about 23% during the same period.

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