Morning Wrap: ASX 200 to fall, S&P 500 sinks + Everything you need to know about the CPI report

Major US benchmarks fell sharply after the hotter-than-expected inflation reading, bond yields spiked to multi-month highs, the market is now expecting only two rate cuts this year (down from a peak of seven in early January), Fitch downgrades China's debt outlook over economic uncertainty and the real estate sector is in for a tough one on Thursday.

Let's dive in.

S&P 500 SESSION CHART

S&P 500 gaps down and remains largely range bound for the rest of the session (Source: TradingView)

MARKETS

• S&P 500 finished lower but off worst levels of -1.37%

• Risk off on hotter-than-expected inflation data

• Markets now pricing in just two rate cuts this year, below the 75 bp of easing implied by the Fed’s median dot plot in March

• Bond yields sharply higher, with the US 10-year yield pushing above 4.5% for the first time since 14 Nov-23

• US Dollar Index has its best day since Mar-23, hits five-month high

• Goldman Sachs says a 2 standard deviation move in 10-year yields, equivalent to ~60 bps today, over a one-month period is when the headwind really kicks in

• Investors shift to European bonds, betting on ECB rate cuts as US inflation concerns persist (FT)

• Outsized inflow of US$126.5bn pumped into ETFs in March, third strongest monthly figure since 2021 (FT)

ASX TODAY

• ASX 200 set to open sharply lower as hot inflation report ignites equities selloff

• Yield sensitive sectors like Real Estate and Utilities to lead to the downside

• Downer EDI awarded $320m road maintenance contract (DOW)

• Former Sportsbet boss and Foxtel’s CEO named as potential CEO for Tabcorp (The Australian)

• NextDC launches $1.32bn 1-for-6 entitlement offer at $15.40 per share (NXT)

• Vulcan Energy begins maiden lithium chloride production in Germany (VUL) 

• WOTSO Property holder BlackWall increases stake to 29.97% from 9.72% (WOT)

INTERNATIONAL STOCKS

• TSMC Q1 sales beat analyst and company's own expectations on solid demand for AI applications (Bloomberg)

• Apple to have assembled US$14bn worth of iPhones in India in FY24 (Bloomberg)

• Microsoft to invest US$2.9bn in Japan data centres for AI foothold (Nikkei)

• US big bank profits to fall in Q1 but investors more focused on net interest margin guidance (Yahoo Finance)

CENTRAL BANKS

• Atlanta Fed President Bostic sees risk of further rate cut delay but may lean more dovish if economy deteriorates (Bloomberg)

• RBNZ leaves rates unchanged, says policy needs to remain restrictive (Bloomberg)

GEOPOLITICS

• Biden calls Israel's conduct of the war a "mistake" and urged quick adoption of a six-to-eight week ceasefire (Politico)

• Hamas says Israel's newest truce proposal does not meet demands but is under review (Reuters)

• US mulls tariffs on Chinese EVs, solar and other renewables (Reuters)

ECONOMY

• US CPI increased more than expected on higher energy and shelter prices (Reuters)

• US core CPI tops forecasts again, likely delaying Fed rate cuts (Bloomberg)

• Fitch downgrades China outlook to 'Negative' from 'Stable, citing increasing debt risks (Bloomberg)

Hot, Very Hot

US inflation data was hotter-than-expected in March.

• Core inflation up 0.4% month-on-month vs. 0.3% consensus

• Core inflation up 3.8% year-on-year vs. 3.7% consensus

• Headline inflation up 0.4% month-on-month vs. 0.3% consensus

• Headline inflation up 3.5% year-on-year vs. 3.4% consensus

The key inflation drivers included:

• Energy index up 1.1% in March after increasing 2.3% in February

• Shelter index up 0.4% in March and the largest driver of core inflation

• Motor vehicle insurance up 2.6% in March after a -0.9% drop in February

• Apparel index up 0.7% over the month

Both analysts and the market pushed back rate cut expectations while bond yields soared to 5 month highs.

• Morgan Stanley – “Upside surprise in core CPI is moving inflation data further away from the convincing evidence the Fed needs to start cutting in June ... print tilts the Fed toward a later start to the cutting cycle than our current forecast for June.”

• Goldman Sachs – “The composition of the report was not as strong ... the jump in car insurance CPI will not flow into the PCE measure. However, the strength in car repair and apparel prices will boost PCE ... We are pushing back our forecast of the first rate cut from June to July. We continue to expect cuts at a quarterly pace after that, which now implies two cuts in 2024 in July and November.”

Below is what the market was expecting at the beginning of the week vs. after the inflation report.

Fed rate cut expectations on Monday, 7 April | Source: CME FedWatch Tool

Fed rate cut expectations on Thursday, 11 April | Source: CME FedWatch Tool

Fed minutes also dropped last night and policymakers largely reiterated the same data-dependent message. Some of the key takeaways include:

• "Participants generally noted their uncertainty about the persistence of high inflation and expressed the view that recent data had not increased their confidence that inflation was moving sustainably down to 2 percent"

• Participants noted concern that financial conditions might not be as restrictive as desired, which could put upward pressure on inflation

• Vast majority of participants judged would be prudent to begin slowing pace of balance sheet runoff "fairly soon"

• Its also worth noting we've heard more than five Fed speaks hose down the idea of imminent rate cuts in recent days

Companies trading ex-dividend: 

• Thu 11 April:  Cosol (COS) – $0.01, Duxton Water (D20) – $0.036

• Fri 12 April: Kogan (KGN) – $0.075

• Mon 15 April: WAM Active (WAA) – $0.03, Cadence Capital (CDM) – $0.03, SDI (SDI) – $0.015, New Hope (NHC) – $0.17

• Tue 16 April: WAM Global (WGB) – $0.06

• Wed 17 April: Washington H Soul Pattinson (SOL) – $0.40 

Other ASX corporate actions today: 

• Dividends paid: Downer EDI (DOW) – $0.06, Woolworths (WOW) – $0.47, Suncorp (SUN) – $0.34, Pacific Current Group (PAC) – $0.15, NRW Holdings (NWH) – $0.065, Qube Holdings (QUB) – $0.04, Brambles (BXB) – $0.23, Fonterra (FSF) – $0.11, Orora (ORA) – $0.05, Macmahon (MAH) – $0.004, Regis Healthcare (REG) – $0.06 

• Listing: None

Economic calendar (AEST):

• 12:30 pm: China Inflation Rate (Mar)

• 11:15 pm: Eurozone Interest Rate Decision

• 11:30 pm: US Producer Price Index (Mar)