Developments in the US financial sector over the past week have thrown a wrench into what seemed to be an inevitable continuation of interest rate hikes by the US Federal Reserve.
Tuesday 21.03. 10:00 GMT, German ZEW Economic Sentiment (March)
ZEW Economic Sentiment is one of the leading economic indicators of Germany. It is compiled by asking experts from banks and other sectors about their expectations regarding interest rates, inflation, 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. For example, if 30% hold positive sentiment, 20% hold neutral sentiment, and 50% have negative sentiment, the ZEW index would result in a reading of -20%.
The ZEW index has returned to positive territory after spending most of 2022 in a negative one. After a surprisingly positive reading in January, it climbed even higher in February, reaching 28.1. The forecast for March is 22.00, the same as in February.
Higher (less negative) than the forecast index would be considered bullish for the market, while a lower (more negative) than the forecast index would be considered bearish.
Impact: DAX
Wednesday 22.03. 07:00 GMT, UK Consumer Price Index (CPI) YoY February
The Consumer Price Index (CPI) measures the change in prices paid by consumers for a basket of goods and services over a given period. This information shows changes from one year to the next. The CPI is a key indicator of inflation - a higher index indicates higher inflation.
Inflation in January was lower than forecast – 10.1% versus 10.3%, although still in double-digits and well above the government's target. The newest consensus expects inflation to return below the 4% level by the end of this year due to the cumulative effect of lower energy and food prices as well as interest rate pressure on consumer spending. For this to happen, CPI data would need to remain firmly on a downward trend. February's CPI is expected to be 10.3%, slightly higher than the previous month but in line with earlier expectations. It is worth noting that the UK is currently left with double-digit inflation despite officially having slid into recession. Its counterparts in the EU and the US registered inflation in February below 10%.
Higher-than-expected data could be bullish for the GBP and bearish for the stock market as it may increase the possibility of further interest rate hikes. Conversely, weaker-than-expected data could be bearish for the GBP and bullish for the stock market.
Impact: GBP, FTSE100
Wednesday 22.03. 18:00 GMT, Fed Interest Rate Decision
What seemed like a "done deal" after the Fed's Powell testimony has been changed after the latest events in the US banking sector, which have left investors wondering about the next Fed decision regarding interest rates. Subject to the US macroeconomic data, the most plausible scenario (with a 78% probability) was a 50bp rate hike, which is currently perceived by the markets as impossible (0% probability) according to the CME FedWatch Tool after the Fed has shut down the Silicon Valley Bank. Investors are watching interest rate changes as short-term interest rates are the key factor in currency valuations. The stock market is expected to react negatively to rising interest rates.
FOMC has been raising interest rates for the last 8 meetings, and the interest rate now stands at 4.75%. Taking into account the latest events, it is unclear what the Fed's decision may be in the following meeting as it may largely depend on how severe the aftermath would be from the recent bank closures, such as a potential spillover to the rest of the financial sector, leading up to the Fed meeting.
A higher-than-expected rate could be bullish for the USD and bearish for the stock market, while a lower-than-expected rate could be bearish for the USD and bullish for the stock market.
Impact: USD, S&P500, and other indexes
Thursday 23.03. 12:00 GMT, UK Interest Rate Decision
The Bank of England's interest rate decision is announced after the inflation report for February earlier the same week, which might possibly affect the decision taken during the BoE meeting. Although inflation in the UK seems to be higher and more persistent than in the US, the current expectation for the BoE meeting is that the interest rate would be unchanged at 4% level. Interest rates have been raised in each BoE meeting since December 2021.
A higher-than-expected rate could be bullish for the GBP and bearish for the stock market, while a lower-than-expected rate could be bearish for the GBP and bullish for the stock market.
Impact: GBP, FTSE100
Stocks to watch
PDD Holdings DRC (PDD) announcing its earnings results for the quarter ending on 12/2022. Forecast: 8.4. Positive earnings surprise in 10 out of the last 10 reports. Time: Monday, March 20, before the market opens.
Foot Locker Inc (FL) announcing its earnings results for the quarter ending on 01/2023. Forecast: 0.4978. Positive earnings surprise in 10 out of the last 10 reports. Time: Monday, March 20, before the market opens.
Tencent Holdings Ltd ADR (TCEHY) announcing its earnings results for the quarter ending on 12/2022. Forecast: 0.4357. Positive earnings surprise in 8 out of the last 10 reports. Time: Wednesday, March 22, before the market opens.
Accenture (ACN) announcing its earnings results for the quarter ending on 02/2023. Forecast: 2.48. Positive earnings surprise in 8 out of the last 10 reports. Time: Thursday, March 23, before the market opens.
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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