It seems that the anxiety over the US debt limit is almost resolved. Already this week, we will receive information on inflation in the eurozone countries and the situation in the US labour market. Let's take a look at analysts' forecasts and how each event might affect the market.
First inflation readings positively surprised
One of the first countries from the euro area to report its CPI inflation reading was Spain. It turned out that the reading beat all analysts' expectations, coming in at just 3.2 per cent (4.4 per cent was expected) against the previous reading of 4.1 per cent. What's more, according to the European Central Bank (ECB), HICP inflation (which takes into account a slightly different consumption basket.) fell in the country to just 2.9 per cent (4.1 per cent was expected).
Source: TradingEconomics
There is still a noticeable trend that the closer we get to the war in Ukraine, the higher the inflation rate. The highest HICP consumer inflation in the euro area is currently in Lithuania, at 15 per cent. Although average inflation in the European Union is now at 7 per cent, down from an earlier peak of 10.6 per cent, we are still away from the inflation target.
Source: https://www.ecb.europa.eu/stats/macroeconomic_and_sectoral/hicp/html/index.en.html
Another positive surprise came from the Italian PPI producer inflation reading. For the first time in more than two years, we have deflation (falling prices), which came in at minus 1.5 per cent (minus 4 per cent was expected), against the previous reading of 3.7 per cent.
Source: TradingEconomics
Key inflation readings in the near term
We will have to wait until Thursday to know the full picture of inflation in the euro area. Analysts predict that CPI inflation will remain at 7 per cent. The ECB interest rate, on the other hand, has been raised to 3.75 per cent and there is still potential for further increases. Currently, analyst consensus suggests 25 bp increases at the June and July meetings. It therefore seems that even if inflation were to turn out to be lower than expected, we can still expect interest rates to rise. Lower readings relative to consensus could in turn positively influence the growth of stock market indices, such as the Dax (DE40). In the EUR/USD pair, which may have made a correction due to the uncertainty surrounding the US debt limit, we may return to a continuation of the trend. This could be supported by the changing economic situation of the eurozone vis-à-vis the US, where inflation is falling, which could encourage potential first interest rate cuts by the Fed.
Source: Conotoxia MT5, EURUSD, Daily
When can we expect the first interest rate cuts by the Fed?
Apart from inflation, the main factor that could influence the Fed's interest rate decision is the situation in the US labour market. As it happens, the preliminary data on the basis of payrolls will be known on Thursday (ADP), and on Friday we will already know the final reading on employment in the non-farm sector together with the unemployment rate. Here it is worth recalling the objectives of Fed activity imposed in 1913 by Congress, which are:
- aiming for high (maximum) employment,
- to strive for price stability,
- ensuring the stability of long-term interest rates.
Currently, the unemployment rate is at its pre-pandemic (3-year) minimum, standing at 3.4 per cent. The analysts' consensus is for no change in this aspect. Nevertheless, the market seems to be already pricing in the first possible interest rate cuts. This can be seen, among other things, through their barometer, which measures the probability of interest rate changes based on the quotations of futures contracts on various types of instruments. With this, we can learn that with a 59 per cent probability we might see a 25 bp hike at the June FOMC meeting, which could be the last in the current cycle. However, the Fed's turnaround on monetary policy is expected to have the potential to transform the economic situation, which would be expected to return to its multi-year growth rate. This could have a particularly positive impact on assets such as the broad equity market, including the S&P 500 Index (US500).
Source: Conotoxia MT5, US500, Daily
Grzegorz Dróżdż, CAI, Market Analyst of Conotoxia Ltd. (Conotoxia 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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