Powell pops champagne, copper goes wild!

Welcome back to SovereignBeat!

In this publication:

• Powell celebrates CPI data, inching closer to rate cuts

• Bond and equity markets surge post-economic data release

• EU gas prices stabilize, but market still wary of Russian supply

• Copper surpassing $10,000 per tonne continues to fuel frenzy

• IMF allocates more funds to Argentina; benchmark interest rate cut to 40%

Let’s dissect

Markets Snapshot

Bond Markets and FX

• US: Inflation dropped to 3.4% in April YoY and 0.29% MoM, in line with the economists' forecasts, sparking investor bets on Federal Reserve interest rate cuts this year. Wednesday's release of the consumer price index by the US Labor Department also marked the end of a four-month streak where inflation exceeded expectations, down from March's 3.5%.

• Meanwhile, retail sales remained unchanged in April, falling below economists’ expectations and following a revised 0.6% increase in March. This data offers significant relief for the Fed, aligning with the combination they were hoping for: inflation moving back towards its target slowly but steadily, and signals of moderating economic activity without yet suggesting a recession. Traders in the futures market increased their bets on the Fed cutting interest rates twice this year following the CPI and retail sales reports. Nonetheless, the latest economic release is unlikely to trigger a reduction in borrowing costs on June 12, the date of the Federal Reserve's next decision announcement.

• Benchmark 10-year US Treasury yields declined by 8 basis points to 4.42% week-on-week. The yield curve inversion between the two-year and 10-year notes narrowed slightly to minus 41 basis points. The next week's auction of $16 billion in 20-year bonds and $16 billion in 10-year Treasury Inflation-Protected Securities (TIPS) will play a crucial role in shaping market sentiment.

Equity Markets

• The equity indixes reached record highs this week, with the Dow surpassing the 40,000 mark for the first time. We are confident that both the stock and bond markets will continue to be influenced by expectations of upcoming Fed policy moves. Although future inflation readings may not consistently exceed expectations, the April CPI report was crucial in maintaining the markets' bullish stance and boosting valuations.

• Following the rally in the U.S., stocks in Asia also experienced a rise. The MSCI Asia Pacific Index edged higher, continuing its gains after closing at a two-year high on Tuesday. Stocks indices also increased in Australia, South Korea, and mainland China.

Commodity Markets

• Gas: European natural gas prices edged up but remained close to their recent EUR 30/MWh. Nonetheless, current prices reflect a 33% increase from February levels, driven by the concerns in the recent months about replenishing fuel inventories for the upcoming winter. The outlook appears promising so far: European gas storage stocks, currently at 63.2% full as of May 5, exceeding the five-year average of 47% and aiming for full capacity by the start of the 2024 winter. This is the second highest level only to 2020 when the collapse of global demand during the COVID-19 pandemic pushed futures contracts below €9. However, there are risks ahead as Chinese demand for LNG rises and Europe competes for supplies. Intense competition with Asian region for liquefied natural gas (LNG) cargoes has traders concerned, particularly as send-out to Europe decreased in April due to Asia's more lucrative spot cargo prices.

• Furthermore, concerns persist over Ukraine’s transit route for Russian gas. As we previously stated a few times, It is highly unlikely that the contract for the transit of Russian gas through Ukraine will be extended beyond its expiration at the end of the year. According to

  Ukrainian military intelligence chief Kyrylo Budanov, Russia's military is deploying "small groups of forces in the border area" near Sudzha on the Russian side. Sudzha serves as the critical interconnection point for gas flowing to Ukraine for transit to European nations.

• Copper: London Metal Exchange (LME) futures breaking above $10,000 per tonne for the first time in two years! Copper plays a pivotal role in the global transition to clean energy, with expectations of doubling demand over the next decade. However, concerns are mounting over the ability of world mines to meet this surge in demand. Traders remain optimistic about the necessity of millions of tonnes of new supply, particularly in sectors such as electric vehicles, renewable energy, and expanded power grids. Goldman Sachs forecasts a deficit of refined copper for 2024 to exceed half a million tonnes.

• Additionally, a short squeeze (a stock moves higher and short sellers need to cover their short positions or are forced to do so via margin calls) last week caused significant disruption in the copper market, leading to a dramatic increase in prices on the Comex exchange (New York based commodity stock exchange) vs LME. Typically, the price difference between Comex copper futures and those on the LME is minimal, usually just a few dollars per ton. However, this differential has soared to an unprecedented level of over $1,200 per ton on Wednesday.

• The wild swings in copper prices underscore how commodity markets can quickly spiral out of control when participants can't finance their positions, exacerbated by low inventories and logistical issues seen across various commodities, including copper abd cocoa(we already covered cocoa here). The volatility on Comex is driven by speculators amid forecasts of a long-term copper supply shortfall.

In Motion

Global Finance

IMF Gives Argentina the Nod, For Now

• The IMF's staff approved the eighth quarterly review of Argentina's USD 44 billion extended fund facility (EFF) program, showing support for President Javier Milei's unconventional economic approach. The Fund staff praised Argentina’s “better-than-expected performance,” noting that its economy has met all targets, including reducing inflation and rebuilding external buffers. Pending the IMF board's approval, Argentina stands to receive nearly USD 800 million, which will help with upcoming debt payments.

• Domestically, the government is signaling about a gradual removal of foreign exchange controls. It is expected that Argentina will complete elimination of controls by the end of the third quarter of 2024. Any delay beyond this timeline could pose risks to the ambitious economic growth and disinflation targets set by the Milei’s government. President’s austerity measures, such as freezing public works and cutting subsidies also helps to generate ongoing fiscal savings. However, despite these efforts, the economy is projected to contract by 2.8% this year, according to the IMF estimates.

• On a separate note , the Central Bank of Argentina reduced its benchmark interest rate from 50% to 40% last week, marking a significant decline from its peak of 133% last December! Concurrently, inflation showed signs of deceleration in April for the fourth consecutive month, with consumer prices rising by 8.8% month-on-month and 289.4% year-on-year. A few weeks ago, we highlighted Argentina's achievement of its first historical quarterly budget surplus in 16 years, a truly historical milestone.

Our thoughts

• The Fund’s verdict provides some validation for Javier Milei and his austerity policies, which included cutting expenditures and subsidies. While Argentina's monetary policy deviates from the IMF's conventional recommendation for real positive rates (where the interest rate exceeds inflation), lower borrowing costs will enable the central bank to strengthen its balance sheet and manage excess liquidity, supported by the currency controls that soon will have to be scrapped. Those controls limit currency transactions, potentially causing losses for savers with returns on their deposits below inflation. Yet, they aid the central bank in shoring up its bleeding balance sheet. This stability, crucial for the central bank comes right now partly at savers' expense.

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Our Further Reading Recommendations

• Russia Opens New Front: What's Next? (NY Times)

• 140bn Debt Sale from China to Boost Economy (FT)