Everybody is Fed-dependent

The major indices in Europe and the US across traded rangebound near their ATH levels and the US dollar index fluctuated a touch above the 105 level ahead of the US and European inflation updates that will start flowing in today.

The major story of Monday was a renewed rally in Gamestop and AMC shares after Keith Gill, aka, Roaring Kitty, posted on X for the first time since 2021. The moves revived the 2021’s meme nostalgia, but the meme stocks will unlikely see their original glory. First, the macroeconomic setting is different: we are in a period of higher interest rates and tight monetary policies where the Federal Reserve (Fed) and other central banks are no longer pumping pandemic-rescue cash into the system. 2. People are not stuck home and savings have melted since the pandemic pile-up. 3. The trading volumes are nowhere close to 2021: around 700’000 options changed hands yesterday, while this number was around 8.5 mio back in 2021. And last but not least, most of the retail traders know that if they are the last the come in, they will lose it all. Of course, because the meme story is irrational, we can’t predict what’s next. But thank you, Roaring Kitty, for spicing up a day that would’ve otherwise been long hours of waiting for the US and European inflation numbers.

Let’s go back to our beans. The US will release the PPI figures for April today. The core PPI is seen stable at 2.4% on a yearly basis, while headline PPI may have ticked slightly higher, from 2.1% to 2.2% last month. A figure in line, or ideally below expectation, should give a sigh of relief to the Fed doves, let the US dollar soften against major peers and help lift appetite in risk assets, while a figure above expectations will further dampen the Fed cut expectations, give a boost to the US dollar and weigh on stock and bond valuations.

Across the Atlantic Ocean, headline inflation in the Eurozone may have stabilized near 2.4% and core inflation may have eased further to 2.7% from 2.9% printed a month ago.

This week’s inflation updates should maintain the ‘diverging inflation dynamics’ narrative live. The US inflation is seen heating up whereas inflation in the Eurozone and the UK are forecasted to continue their journey to the south – toward the central banks’ 2% inflation target. The latter divergence obliges the Fed to postpone its rate cut plans, but keeps the European Central Bank (ECB) and the Bank of England (BoE) on track to cut their rates this summer.

Both the ECB and the BoE say that they are ‘data dependent and not Fed dependent’. But that’s true under one condition: the euro and sterling should not depreciate significantly against the USD. So far, both the euro and sterling resist surprisingly well to the divergence between the hawkish Fed versus dovish ECB and BoE.

• Slight improvement in EZ growth numbers versus a significant slide in the latest growth data partly explain the tempered USD appreciation.

• The idea that the Fed’s next move is a rate cut – even if it comes a bit later than many have hoped at the start of the year – prevents the USD bulls from coming back forcefully in charge. The Fed also announced to slow QT at the March meeting.

Yet, note that the US dollar index advanced up to 5% since the start of this year and risks are tilted to the upside as long as we don’t see the US inflation return to the falling path.

And the reality is that we are all Fed dependent. No matter what the ECB and the BoE say, they can’t walk it alone if the US dollar appreciates due to a U-turn in the US inflation. A significant dollar appreciation would boost inflation in the Eurozone and the UK, and bring the ECB and the BoE to review their rate cutting plans beyond summer.