- Mild rebound after Wall Street volatility overnight
- Eyes turn to US inflation data out today
- ECB to act sooner rather than later?
European stocks made mild gains in early trade on Wednesday after a wild ride on Wall Street, with the Stoxx 600 up around 0.6 per cent. The Dow gave up a 500pt gain at one point to finish the session down a quarter of a percent, whilst the S&P 500 held some gains to finish up the same margin. Tech rallied, with the Nasdaq up 1 per cent for the session but gains seem precarious, and the market is one where you feel rallies are still being sold. Treasury yields are lower, with 10s around 2.95 per cent as markets price for slower growth. Recession fears equal lower inflation which is good for stonks… I guess this is what the Fed wants. US futures are a smidge higher this morning.
The S&P 500 made a fresh low at 3,958 but recovered to close above the psychological 4,000 level. No real signs of a turn just yet... I think further to run and beaten down tech can drop even further. As a matter of housekeeping, we should note that 50 per cent of the Nasdaq is down more than 50 per cent. Moreover, whilst we are seeing indices in correction/bear market territory, the breadth of stocks in ‘oversold’ territory is not that high. Nowhere near oversold across the market and breadth is terrible – setting up for a slow grind lower.
FOMC member Mester said hiking pace ‘about right’, need to go beyond neutral. Fed’s Williams says 50bops hikes at each of the next two meetings are the base case. Waller: "We know what happened for the Fed not taking the job seriously on inflation in the 1970s, and we ain’t gonna let that happen.”
All eyes today are on the US CPI inflation print. Headline CPI in March rose by 8.5 per cent from a year before, the fastest annual gain since December 1981. Core inflation, excluding food and energy, rose 6.5 per cent. Today’s print is expected to be similarly high, but will it show signs of cooling or heating? The Fed raised rates by 50bps last week and was relatively cautious as it played down speculation for larger increases over the coming months. If inflation continues to build, the Fed may need to up its pace and this could leave stocks in danger of further selling pressure. Forecasts from the big banks indicate deceleration in inflation, with CPI dropping closer to 8 per cent, which would certainly be a relief for risk assets.
Chinese PPI inflation, a key leading indicator for consumer prices in the West, rose to 8.0 per cent in April vs 7.8 per cent forecast, lockdowns hurting supply chains as food was stockpiled. Chinese CPI rose to 2.1 per cent against 1.9 per cent expected and 1.5 per cent prior. German CPI inflation also rose to 7.4 per cent, though the month-over-month gain of +0.8 per cent decelerated from the +2.5 per cent chalked up in March.
ECB hawks get louder: Nagel says ECB should hike in July if incoming data confirm that inflation is too high, and should end APP at the end of June. Also noted that the risk of acting too late is 'increasing notably'. I'd say that ship has sailed... Nagel noted 'disturbing evidence' that increase in prices is gaining momentum... max CB divergence past?
Neil Wilson is the Chief Market Analyst at markets.com
