Interest rate decisions from both the US Federal Reserve and the European Central Bank are scheduled for next week and will be closely watched by global financial markets. The recent unexpected rate hikes by the central banks of Australia and Canada have increased worries about the potential central banks' decisions next week.
Tuesday 13.06. 09:00 GMT, Germany ZEW Economic Sentiment (June)
ZEW Economic Sentiment is one of the leading economic indicators of Germany. It is created based on interviewing experts from banks and other sectors about their expectations regarding interest rates, inflation rates, exchange rates, stock markets and other measures, such as the economic development of the world's major economies, in order to develop a sentiment for the German economy for the next six months.
The ZEW Indicator of Economic Sentiment is calculated by comparing the number of experts with positive versus negative sentiment. An indicator above 0 indicates optimism, while a result below 0 indicates pessimism. For example, if 30% hold positive sentiment, 20% have neutral sentiment, and 50% hold negative sentiment, the ZEW index would result in -20%.
After spending the first four months of the year in positive territory, May's ZEW outlook unexpectedly fell to -10.7, resuming a more pessimistic sentiment. Partly responsible for this decline could be the anticipation of upcoming interest rate increases from the European Central Bank, which, combined with concerns about a potential default by the United States, have amplified uncertainties surrounding global economic progress. As a result, financial market experts expect the already unfavourable economic conditions to worsen over the next six months. The negative ZEW outlook also highlighted the potential for a mild recession in the German economy in the foreseeable future.
Source: Tradingeconomics.com
A higher-than-expected reading may be considered positive/bullish for the EUR, while a lower-than-expected reading may be taken as negative/bearish for the EUR.
Impact: EUR, DAX
Tuesday 13.06. 12:30 GMT, U.S. Consumer Price Index and U.S. Core Consumer Price Index YoY (May)
The CPI index measures changes in the prices of consumer goods and services. It covers different types of products, such as food, fuel, transportation services, cosmetics, household goods, clothing, and many others. The purpose of the CPI index is to measure the increase or decrease in the cost of living for consumers. This means that as the CPI index rises, consumers' purchasing costs increase, affecting their money's purchasing power. The CPI index is used to monitor inflation or the overall rise in prices in the economy. It allows us to assess whether prices are rising too fast or too slowly and to determine what economic policy measures should be taken to offset the adverse effects of inflation.
An important difference between the CPI and Core CPI is that the latter measures the level of price change, excluding food and energy. Their presence or absence in the basket may make a considerable difference in the outcome. Generally, central banks prefer Core CPI as a measure of inflation because food and energy prices tend to be more volatile.
The CPI has stabilised at around 5% in the last two months after a sharp decline from its long-term high of 9.1% in June last year. Interestingly, CPI was higher than the Core CPI for a long time, indicating that a large part of inflation was contributed by food and energy prices. However, with core inflation around 5.6% since December 2022, we may conclude that this tendency has changed.
Source: investing.com, graph: author
On the one hand, if the reading is higher than expected, it means that inflation is higher, which may favour a fall in the US dollar value. Meanwhile, it is also a stimulus for the Fed to raise interest rates and reduce the money supply causing an increase in the US dollar. On the other hand, if the reading is lower than expected, it may give the Fed an argument to stop its policy of raising interest rates.
Impact: USD, S&P500
Wednesday 14.06. 18.00 GMT, Fed Interest Rate Decision
At Federal Open Market Committee meetings, members vote on whether to raise, decrease or leave interest rates unchanged. These decisions affect the currency's value, and interest rate policy is among the key instruments to regulate inflation. Investors closely follow the FOMC's decisions and changes in the level of interest rates, as this information can be crucial to their trading strategies. The value of a currency tends to rise when interest rates are high, as they attract investors seeking higher returns on their deposits. Conversely, when interest rates are low, the currency's value tends to fall as investors look for other places to invest their money. As a result, FOMC decisions and interest rate levels have important implications for global financial markets and national economies.
The current target rate is 5.00% - 5.25%, and according to CME target rate probability calculations, the target rate may stay unchanged in the upcoming meeting. However, the decision may be affected by the CPI readings coming out a day before.
Source: Tradingeconomics.com
A higher-than-expected rate may be positive for the USD and negative for the stock market, while a lower-than-expected rate may be negative for the USD and positive for the stock market.
Impact: USD, S&P500
Thursday 15.06. 12:15 GMT, Eurozone Interest Rate Decision
The European Central Bank (ECB) has a six-member Governing Council, which, together with the 16 central bank governors of the Eurozone, decides the level of interest rates. These decisions may be crucial for investors who follow interest rate changes because they may affect currency valuations, especially in the short term.
At its May meeting, the European Central Bank raised its key interest rates by 25 basis points, indicating a slower pace of policy tightening. Despite this adjustment, borrowing costs have now reached their highest level since July 2008, following a series of seven consecutive rate increases. The ECB's objective is to combat high inflation, even amid ongoing recession risks. Furthermore, the central bank announced its intentions to cease reinvesting cash from maturing bonds acquired under the 3.2 trillion EUR Asset Purchase Program starting in July. Recent economic data revealed that the inflation rate in the Eurozone surged to 7% in April, with the core rate remaining near the record high set in March at 5.6%. As a result, President Lagarde stated during a press conference that the ECB still had further progress to make and did not intend to pause the cycle of increasing rates anytime soon, indicating that a 25 basis point rate increase may be expected in the upcoming meeting.
Source: Tradingeconomics.com
If the reading is higher than expected, it may positively affect the euro and negatively affect the stock market. Meanwhile, if the reading is lower than expected, it may have a negative effect on the euro and a positive effect on the stock market.
Impact: EUR, STOXX, DAX
Friday 16.06. 09:00 GMT, Eurozone Consumer Price Index (CPI) YoY (May)
Eurozone CPI has faced higher inflation than the US during the recent high inflationary cycle. According to an initial estimate, the Eurozone's consumer price inflation rate dropped to 6.1% in May 2023, compared to 7.0% in the previous month, and it was slightly below the market's anticipated rate of 6.3%. Preliminary data will be confirmed or changed with the upcoming reading. This decrease marks the lowest level since February 2022, although it remains significantly higher than the European Central Bank's target of 2.0%. The decline in inflation was mainly due to a 1.7% fall in energy prices, following a 2.4% rise in April. There was also a slowdown in cost pressures in categories such as food, alcohol and tobacco (12.5% compared to 13.5%), non-energy industrial goods (5.8% compared to 6.2%), and services (5.0% compared to 5.2%). Additionally, the core inflation rate, which excludes energy, food, alcohol, and tobacco, also eased more than expected, reaching 5.3%.
Source: Tradingeconomics.com
On the one hand, if the reading is higher than expected, it favours a fall in the euro's value. Still, it is also a stimulus for the European central bank to raise interest rates and reduce the money supply, and from this side, it may cause an increase in the value of the euro. On the other hand, if the reading is lower than expected, it means lower inflation and may give the European Central Bank an argument to stop its policy of raising interest rates.
Impact: EUR, STOXX
Stocks to watch
Oracle (ORCL) announcing its earnings results for the quarter ending on 05/2023. Forecasted EPS: 1.58. Positive earnings surprise in 8 out of the last 10 reports. Time: Monday, June 12, after the market closes.
Adobe (ADBE) announcing its earnings results for the quarter ending on 05/2023. Forecasted EPS: 3.79. Positive earnings surprise in 9 out of the last 10 reports. Time: Thursday, June 15, after the market closes.
Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or 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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