Friday Roundup: Markets tumble upon further signs of tightening by central banks; Positive balance sheets; What to watch for

by Market Updates and Alerts |

Signs that a rate hike is here to stay hit stocks and bonds, overshadowing good news from the corporate side

Jerome Powell calls the shots: the Federal Reserve’s (Fed) priority is to tame inflation, and the impact of the war in Ukraine on economic growth should not derail the central bank from this path. The assertion, shared by members of the European Central Bank (ECB), led to a devaluation of sovereign bonds and variable income in Europe and the United States.

This morning, both European stock exchanges, where investors prepare for the second round of voting in the French presidential elections on Sunday, and US index futures, were trading in the red. Contracts indexed to the Nasdaq 100 and the S&P 500 signaled that New York stocks may be heading for a third week of declines.

In the face of such signals, investors got rid of positions in bonds. Yields on two-year US bonds, more sensitive to changes in monetary policy, rose as much as eight basis points this morning to 2.76%, the highest premium since late 2018. Treasury even jumped to 2.95%.

The dollar advanced to its highest level since July 2020 amid losses for the British pound, with data showing that the UK’s cost-of-living crisis is hampering consumer spending – UK retail sales rose only 0.9% in March, well below the 2.8% expected and 7.0% for February.

0,50 pp on the table

Monetary tightening is already a reality and the Fed chairman himself speaks of a half-percentage-point increase in interest rates in May, instead of the usual 0.25 point to initiate a change of bias in central bank policy.

Powell stuck to the fiercer speech and commented that many participants in the FOMC, the Fed’s committee that arbitrates on interest rates, preferred one or more 50-point moves. He noted that it would be appropriate to move relatively quickly and that, in this sense, the argument of anticipating an interest rate hike has its merits, given the historically heated labor market and inflationary risks.

A strong chorus

Other Fed members endorsed stronger policies to fight inflation. Mary Daly, the normally more moderate San Francisco Fed official, spoke yesterday of the likelihood of applying two 0.5 point hikes to interest rates. James Bullard of the St Louis Fed, known for his more aggressive speech, advocates a 0.75 percentage point increase. Investors are now betting on half-point increases in May, June and possibly July.

Europe

In her presentation, ECB leader Christine Lagarde made a distinction between the different economic realities of Europe and the US, but did not rule out the possibility of a rate hike for the bloc at the July meeting.

Positive balance sheets

Of the 91 S&P 500 companies that have reported quarterly results so far, more than 80% beat earnings estimates and 65% beat sales forecasts, according to a Bloomberg analysis. Positive surprises are seen across all industry groups, underpinning a broad recovery.

Thursday’s numbers

Dow Jones (-1,05%), S&P 500 (-1,48%), Nasdaq Composite (-2,07%), Stoxx 600 (+0,32%)

Jerome Powell returned and with him returned losses in US stock markets. The Fed chairman sounded the alarm by anticipating, once again, a tighter monetary policy to control inflation.

What to watch for

Friday

  • PMI Indices: US, Eurozone, Germany, France, UK
  • US: IMF meetings; Baker Hughes Probe Count
  • Europe: UK (GfK Consumer Confidence; Retail/Mar Sales)
  • Latin America: Mexico (IPC/1st fortnight of April)
  • Central Banks: Speeches by Christine Lagarde (President of the ECB) and Andrew Bailey (President of the BoE)
  • Balance sheets: Volvo, Verizon, SAP, Newmont, American Express, Schlumberger, Kimberly-Clark

Monday

  • USA: IMF meetings (Saturday and Sunday); Chicago Fed National Activity Index (Mar)
  • Europe: Eurozone (Construction Sector Production/Feb); Germany (Ifo Business Climate Index/Apr; Business Expectations/Apr); Spain (IPP/Mar); France (On Sunday: Presidential Elections 2nd round)
  • Asia: Japan (Index of Background Indicators; Unemployment Rate/Mar)
  • Latin America: Brazil (Consumer Confidence FGV/Apr; Bulletin Focus; Foreign Direct Investment/Feb; Current Transactions/Feb; Federal Tax Revenue); Mexico (Economic Activity/Feb)
  • Balance sheets: Coca-Cola, Roche, Hyundai Motor, Sun, Vivendi SA PK, Whirlpool