The consequences of Friday's inflation data from the United States, which was the highest since December 1981, were still seen during yesterday's session on Wall Street. The echoes of this publication are not silent this morning either.
Investors have started to price in the possibility of the Fed raising interest rates as early as this Wednesday by 0.75 percentage points or even by 1 percentage point compared to 0.5 percentage points last week. What's more, the peak of the hike cycle could be 4 percent, not 3 percent as previously thought. This was enough to cause chaos in the financial markets, which has not been seen for a long time. US bonds, shares and cryptocurrencies were heavily under pressure in fear of rapid monetary policy tightening and increasingly difficult access to money. This may also increase fears of recession, which combined with high inflation could turn into stagflation. This, in turn, could negatively affect the labor market. And the great crisis is ready.
The changes that are taking place in financial markets nowadays have not been observed for decades. For example, the two-day change in interest rates on US bonds was the biggest since 1987. The fall in bond, stock or cryptocurrency prices also showed that all capital flows from these markets can still go to the US dollar. EUR/USD fell to a 4-week low at 1.04.
The European Central Bank will end its asset purchases on July 1 and then raise interest rates by 25 or 50 basis points in July. The bank also signaled that a larger rate hike may be needed in September if the inflation outlook worsens. Eurozone annual inflation hit new records in May, with the ECB's new forecasts putting it at 6.8 percent in 2022 before falling to 3.5 percent in 2023 and 2.1 percent in 2024. What assumptions does the Fed have on this topic? That's what we'll find out on Wednesday night when the latest macroeconomic projections are released.
It seems that the only argument for the Fed not to raise interest rates by 0.75 or 1 percentage point is the divergence between CPI inflation and core inflation, which fell for the third consecutive month in May. A 0.5 percentage point hike in current market conditions could bring a so-called relief rally across many asset classes.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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