The world seems headed for a massive suppression of consumer demand, one of the two components of inflation. This may be indicated by consumer sentiment data, which is dismal, while central banks may continue to raise interest rates rapidly. That, in turn, could worsen sentiment in the stock markets.
U.S. stock futures stabilized Wednesday in Asian trade after major indexes closed sharply lower overnight as economic concerns continued to weigh on sentiment. Stocks rose in early regular trading on Tuesday before quickly losing ground after a disappointing consumer confidence index reading. The Dow fell 1.56 percent, the S&P 500 lost 2.01 percent and the Nasdaq Composite fell 2.95 percent. Technology stocks led the declines, while energy companies outperformed on rising oil prices. U.S. consumer confidence fell to its lowest level in 16 months in June as inflation concerns persisted and short-term expectations fell to their lowest level in nearly a decade. Federal Reserve officials in San Francisco and New York on Tuesday favored aggressive interest rate hikes to control inflation, but dismissed growing concerns that doing so could trigger a recession. They were talking about possible increases of 0.75 percentage points. Ultimately, the federal funds rate could be 3.5 percent by year-end.
Meanwhile, the yield on the U.S. 10-year Treasury note remained above 3.2 percent, rising 14 basis points from the two-week low of 3.0 percent reached the previous week, as investors assessed the outlook for monetary policy ahead of the PCE reading for May due this week. Investors may now turn their attention to the Federal Reserve's preferred measure of inflation, which may provide further clues to the path of monetary policy tightening. The market consensus seems to point to the possibility of a core inflation reading of 4.8 percent. If that were to happen, it would mark the third consecutive month of decline in that indicator from its February peak of 5.4 percent.
As in the United States, consumer sentiment is not the best in Europe. The GfK consumer climate index in Germany fell to a record low of -27.4 points. All of the major sub-indexes lost ground, with the rising cost of living a factor as consumers continue to perceive a significant risk of recession in the German economy. The economic expectations index fell to -11.7 from -9.3; income expectations fell to -33.5 from -23.7, the lowest value in nearly 20 years. Willingness to buy fell to -13.7 from -11.1.
- The ongoing war in Ukraine and disrupted supply chains are causing energy and food prices to soar, making consumer sentiment gloomier than ever, said Rolf Bürkl, a GfK consumer expert.
- The European Central Bank will continue its path of policy normalization and will go as far as necessary to bring eurozone inflation back to its 2 percent target, he said. - President Lagarde said during a speech at the ECB's annual forum in Portugal. Lagarde confirmed that net asset purchases will end on July 1 and interest rates will be raised by 25 basis points in July, the first increase in 11 years.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Conotoxia investment service)
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