Prior to US inflation data, equities remain stable and rates are falling

Prior to US inflation data, equities remain stable and rates are falling

On Wednesday, global stocks gained and bond yields fell further below recent highs ahead of US inflation data that will provide insight into how aggressively the Federal Reserve would hike rates. Before the release of the much awaited datapoint, economists say it could signal inflationary pressures in the world’s largest economy are peaking, European markets continued their recovery from two-month lows, while U.S. futures also climbed. After falling to its lowest level since November 2020 on Tuesday on expectations that Fed tightening will considerably impair the global economy, MSCI’s global market index rebounded 0.3 percent by 1044 GMT. So far this year, the index is down 17%.

“If inflation continues to print higher and higher the market will continue to sell-off. Intuitively inflation cannot keep going up as base effects will unwind at some point but are we are that price yet?” he added. Analysts expect the U.S. consumer price index to show an 8.1% annual increase, 0.4 percentage points lower than the prior 8.5%, which was the hottest reading since 1981.

The pan-European STOXX 600 equity benchmark index rose 1.3%. U.S. equity futures rose, with the Nasdaq and S&P 500 e-minis up 1.5% and 1.2% respectively. Concerns over faltering growth, exacerbated by the latest virus lockdowns in China, curbed a selloff in government bonds that saw 10-year U.S. benchmark yields surge past 3% this month for the first time since December 2018. “It’s an unanchored market where people don’t know where (yields) are going. The growth side is coming more and more to the fore in terms of market concerns,” said Charles Diebel, head of fixed income at Mediolanum International Funds.

They also predict a sharp pullback in monthly growth, cooling to 0.2% in April from 1.2% in March. In Asia, equities squeezed higher from near two-year lows. Chinese blue chips rose 1.4% after Shanghai officials said half the city had achieved “zero COVID” status, and after U.S. President Joe Biden said he was considering eliminating Trump-era tariffs on China.

Euro-area government bond yields also fell to their lowest levels in almost a week on signs that any tightening in European Central Bank monetary policy will be gradual. German 10-year yields fell 4 bps to 0.964%. Bets aggressive Fed tightening have also supported the dollar this year.

Chinese data released on Wednesday, however, showed consumer prices gained 2.1% from a year earlier, above expectations and at the fastest pace in five months, partly due to food prices. Benchmark 10-year Treasury yields fell to their lowest levels in almost a week, extending their fall from the three-year high of 3.203% hit on Monday, on bets the CPI data could show surging inflation finally starting to peak. The 10-year yield fell to as low as 2.9270%, down 5 basis points (bps) on the day, while the 2-year yield, which often reflects the Fed rate outlook, fell 1.8 bps to 2.5858%.

The dollar index, which measures the greenback against six main peers, fell 0.4% to 103.57, below the two-decade high of 104.19 reached the start of the week. The Fed last week raised interest rates by 50 basis points and Chair Jerome Powell said two more such hikes are likely at the U.S. central bank’s coming policy meetings.

There has also been speculation in markets the Fed will need to go in for a massive 75 basis point hike at one meeting and currently Money markets are pricing over 190 basis points of combined rate hikes by year. “The current problem is that the market is convinced that the Fed is determined to fight inflation and therefore willing to tolerate market volatility and some demand destruction more than in the past. I’m less convinced of this determination,” said Giuseppe Sersale, fund manager at Anthilia.

Morgan Stanley forecasts this year’s global economic growth to be less than half of 2021 at 2.9%, down from a previous estimate of 3.2%. The U.S. bank also cut its year-end target for the S&P 500 by 11% to 3,900 points, while raising its U.S. 10-year yield forecast by 55 bps to 3.15%. Oil bounced back, buoyed by supply concerns as the European Union works on gaining support for a ban on Russian oil. Brent rose 2.9% to $105.40 a barrel and U.S. crude rose 3% to $102.79. Spot gold rose 0.8% to $1,852.65 an ounce.

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