Wednesday Roundup: Markets thrive with US inflation data on the horizon; ECB’s Lagarde joins chorus for interest rate hikes

by Market Updates and Alerts |

All eyes are on the US Consumer Price Index (CPI). Meanwhile, stock index futures have gained traction in the US, with both Nasdaq and S&P up about 1%. European markets followed suit on the positive trend.

The greenback took a hit against its peers, and premiums on Treasury bonds fell, pushing up the nominal value of these assets. US-listed Chinese stocks rebound in premarket New York trading after the Asian nation reported a decline in Covid-19 cases.

Despite the gains, sentiment remains fragile as investors seek evidence that price pressures are reaching a peak.

Inflation

The villain of purchasing power, the one that has been stealing the sleep of the leaders of world central banks, returns to the scene as the great protagonist of the day. Are the Federal Reserve’s (Fed) efforts to tame inflation in the world’s largest economy starting to pay off?

The market believes so. If analysts’ expectations are confirmed, the advance in prices will lose steam and will mark 8% in April, compared to the previous year. This would be the first slowdown since August 2021, leaving the 8.5% rate in March as the high for the current cycle. Also scheduled for today is the CPI of Europe’s largest economy, Germany.

Reflections on monetary policy

Disruptions to supply chains related to the Russia-Ukraine war and the lockdowns in China are driving up the cost of living, so a softer reading of inflation will come as a hope that the Fed doesn’t have to weigh its hand further on interest rates, the remedy that central banks from various corners of the globe have used to bring inflation closer to their targets.

What Fed members have to say

While waiting to see how the inflation will behave, traders gather data to build their strategies. Yesterday, Cleveland Fed President Loretta Mester said that a 0.75 percentage point hike in US interest rates is not out of the table if inflation persists. His New York counterpart, John Williams, expects the central bank “to move quickly to bring the federal funds rate back to more down-to-earth levels this year.”

ECB’s Lagarde joins chorus for interest rate hikes

Speeches are scheduled today by other members of the Fed, the president of the European Central Bank (ECB), Christine Lagarde, and leaders of the Central Bank of Germany. European Central Bank President Christine Lagarde joined other ECB members in signaling interest rate hikes. This morning, Lagarde remarked that a first rate hike in more than a decade could come “weeks after the liquid asset purchase ends”.

“We have not yet precisely defined the notion of ‘some time,’ but I have been very clear that this could mean a period of just a few weeks,” she said, advocating a “gradual” normalization of monetary policy after an initial increase.

Faced with record inflation that is nearly four times the ECB’s 2% target, Lagarde’s ECB colleagues are increasingly and publicly pushing for a rise in the cost of money at their July 20-21 meeting. While the Federal Reserve and Bank of England are on course to tighten policy, the ECB has not raised borrowing costs since 2011. Its deposit rate has been negative since 2014.

Tuesday’s numbers

Dow Jones (-0,26%), S&P 500 (+0,25%), Nasdaq Composite (+0,98%), Stoxx 600 (+0,68%), Ibovespa (-0,14%)

On a volatile and mixed day, US stock markets were still feeling the brunt of bearish investor sentiment amid fears that the world’s largest economy could slide into recession with a combination of inflation and high interest rates. Also affected on the day were statements by Fed officials about a potentially tougher move by the US central bank.

What to watch for

Wednesday

  • US: CPI/Apr; 30-Year Interest and Mortgage Applications – MBA; MBA Purchasing Index; Actual Yield/Apr; Crude Oil Inventories; Activity of Oil Refineries – EIA; API Weekly Crude Oil Inventories; Federal Budget Balance/Apr
  • Europe: Germany (IPC/Apr); Portugal (IPC/Apr; Unemployment Rate/1Q22)
  • Asia: Japan (Index of Antecedent Indicators/Mar)
  • Latin America: Brazil (IPCA/Apr; Foreign Exchange Flow)
  • Central Banks: Speeches by Christine Lagarde (President of the ECB); Frank Elderson (BCE); Joachim Nagel (President of the Bundesbank); Claudia Buch (Vice President of the Bundesbank)
  • Balance sheets: Toyota, Disney, Rivian, BancColombia, Ypf sociedad, Toyota Motor, Banco do Brasil, JBS, Braskem

Thursday

  • US: PPI/Apr; Initial Applications for Unemployment Subsidy; OPEC Monthly Report
  • Europe: Germany (Current Account); United Kingdom (GDP/1Q22; Business Investment/1Q22; Public Expenditures; Construction Production/Mar; Industrial Production; Service Sector Index; Trade Balance)
  • Asia: Japan (Trade Balance/Mar; Bank Loans/Apr); China (New Loans)
  • Latin America: Brazil (Growth of the Services Sector/Mar); Mexico (Industrial Production/Mar); Argentina (CPI/Apr)
  • Central Banks: Speech by Mary Daly (Fed);  Bank of Japan Opinion Summary
  • Balance sheets: SoftBank, Siemens, Allianz, RWE, Telefónica, Affirm, Commerzbank