The annual inflation rate dropped to 5% in March, down from 6% in February.  Seemingly good news, but probably not enough to fend off another Fed rate hike in May. Stocks reacted to the news on Wednesday in a way that can be described as neutral.

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At the close of trading yesterday, the S&P 500 was down 17 points, to close at 4,092, the Dow closed at 33,647, down 38 points and the Nasdaq Composite closed at 11,929, down 103 points. Most actives were all down, save for PG&E (PCG) which was up 0.8%.

Chart: The New York Times

In morning futures trading S&P 500 market futures are up 8 points, Dow market futures are up 25 points and Nasdaq 100 market futures are up 43 points.

In an in the spotlight feature, TalkMarkets contributor Gregor Horvat notes that Fed Minutes And US CPI Data Sends EUR/USD Higher.

"Regarding the Fed Minutes, some participants expressed concern that developments in the banking sector would lead to tighter credit conditions, weighing on activity. Somehow this can help to slow down economic activity, so there may not be a need for an aggressive rate policy moving forwards, especially after today's US CPI data. But of course, PCE on Friday will be important as well. USD remains on the back foot. Also, some participants mentioned that they were debating whether it would be appropriate to keep rates unchanged at this meeting.

Sounds a bit dovish, no? But apparently not enough for stocks to rally. US notes are somehow sideways, but USD is down, especially vs EUR after ECB's Holzmann comment that the inflation outlook suggests another 50 basis point rate hike in May."

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Contributor Matias Salord headlines FOMC Minutes: Staff’s Projections Included A Mild Recession Starting Later This Year.

"The Federal Open Market Committee (FOMC) released the minutes of the March 21-22 meeting, spurring little action across the FX board. According to the document, staff’s projections included a “mild recession starting later this year, with a recovery over the subsequent two years”. 

In March, the Federal Reserve (Fed) raised the key interest rates by 25 basis points to 4.75% - 5.0%, as expected amid banking turmoil. Since the meeting, banking concerns eased and inflation data released on Wednesday showed the Consumer Price Index slowed to 5% in March, the lowest since May 2021; however, the Core rate edged higher to 5.6%. The minutes showed that some Fed officials would have considered a 50 basis point rate hike in the absence of the developments in the banking sector."

 Monica Kingsley is of the opinion that there are still some profits to be made in the current spring rally and reminds readers that she was not surprised by the lower CPI numbers as she explains in CPI Fireworks Told You.

"S&P 500 consolidated, but markets still favored a bullish resolution to today‘s CPI, which I told you about with plenty of advance warning – be it Sunday or today European morning. Sure enough there is still more to squeeze in this bear market rally, I confirmed before the CPI release. I also wrote that the Fed would as a result be challenged to back off from tightening, and the data release aftermath confirms that."

"I didn‘t even bring up the bearish targets (applicable to medium-term as at least this week is still a bullish one) yesterday – after closing midpoint between 4,115 and 4,160s resistance, I‘ve prepared you for 4,160s to be thoroughly challenged, and here we are. The buyers don‘t look to be done, and can think about 4,188 target at their convenience."

TM contributor Moe Zulfiqar is signaling more caution saying Don’t Get Complacent: Odds Of Financial Crisis Still Uncomfortably High.

"You might be wondering if it’s time to let your guard down. The worst is behind us and we can move on, right?

Here’s the truth: the odds of a financial crisis are still uncomfortably high."

"...there’s a lot of evidence that the U.S. economy is slowing down.

Interest rates have surged. At times, the financial world focuses too much on the Federal Reserve, but you must also look at the bond market. It has seen black swan event-like trading over the past year or so. No one had predicted that the yields on bonds would skyrocket as much as they did.

And it’s starting to look like lending is tightening...looking at what’s been happening in the financial sector, I can’t help but say: don’t be complacent. The snowball may have just left the peak of the mountain.

Let me be clear: I’m not rooting for a financial crisis. In times of a financial crisis, you get severe volatility and a lot of wealth destruction. I just want you to know there are risks that shouldn’t be ignored.

If a financial crisis becomes a reality, what will the Federal Reserve do? If the Fed starts cutting interest rates, what will happen to the inflation that still needs to be pushed down a bit? Moreover, if the Fed starts cutting rates, how low will they go? Could we possibly see negative interest rates in a matter of a few quarters?"

Good questions, Mo, but negative rates by December...

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TalkMarkets contributor Giles Coghlan dives into one of the ironies of the current banking sector kerfuffle writing about The Problem Facing U.S. Banks.

"Despite the Fed having hiked rates to nearly 5% the national average for banks offering interest rates is 0.24% a year...It is strange because 3-month US treasuries are offering a yield over 4%. That is the rate at which banks can purchase US treasuries and earn that 4% plus yield back on their assets. (The assets are the depositor’s capital). So, in theory, the banks should be able to offer higher interest rates of 3.5%+. So, why aren’t they?

Prior to the Fed hiking interest rates banks were buying longer dated US Treasuries at very low yields as it was a low interest rate environment. The problem now is that much of that capital is still tied up in those lower yielding treasuries, so they don’t have the liquidity to purchase new higher yielding bonds. 

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Didn’t the Bank Term Funding Program solve it?

No, because (Brownstone Research explain that) these funds are being used for operating expenses and to return deposits to people leaving the banks. This will create another problem because banks need to pay back their Bank Term Funding Program loans. So, this is why some commentators are very nervous about the banking sector and that there may be more weakness to come. Furthermore, with inflation high (6% at the time of writing), depositors will want more than a 0.25% yield. It literally means that their money is losing value in the banks. This in turn will create further problems for banks as more and more depositors will be looking for better returns."

Pivoting to commodities here are two takes on U.S. Corn to close out the column for today.

Contributor Bill Moore  in his latest AgMaster Report - Wednesday, April 12 has this snapshot:

"May Corn

Corn has been the beneficiary of amazing export demand from China – which has bought US Corn almost every day for the last 3 weeks! And then, a week ago, OPEC announced it was cutting daily production by over 1 million barrels a day – immediately spiking up crude oil by $5.00 and greatly enhancing ethanol demand! The USDA has forecast corn acres to rise by over 3 million acres but many analysts are quite skeptical of that big of an increase! US corn – with the help of a much depleted US Dollar remains the “low bid” on the global mkts and that advantage should keep exports flowing & prices on the rise!"

Contributor Dan Flynn writes Negative Spin For Corn On USDA Stockpiles.

"On the Corn Front all in all the USDA corn data was not impressive with traders expectations. Argentina’s numbers came in a little better than the street expected but still was still no surprise to the actual. Brazil is pretty much done as the second harvest is moving while their production remained the same. Funds reversed their short position before the report and are taking less heat in the overnight wit corn in the green for the moment. Exports to China will continue to be a wildcard as Brazil’s 2^nd harvest is expected to exceed the USDA’s forecast. A wet cold front is expected in the Midwest corn belt this weekend and slow plantings. Tomorrow’s Export Sales will be of interest to support corn prices. In the overnight electronic session the May corn is currently trading at 654 ¼ which is 3 ¼ cents higher. The trading range has been 654 ½ to 648 ¾...

Feed and industrial use is unchanged at 5.275 billion bushels based on indicated disappearance during the December February quarter. FSI is lowered for corn use for glucose, dextrose and starch. The agency maintained its forecast that 5.25 million bushels of corn will go to fuel ethanol production for 2022-23 down from 3.326 billion bushels for 2020-21. While supply and use falling by the same amount, ending stocks are unchanged at 1.342 billion bushels. The season-average from price is unchanged at $6.60 per bushel."

See both articles for more commodity news.

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Caveat Emptor.

Have a good one.

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