Inflation up and GDP down, stock exchanges at risk? Not really
US inflation at its highest since 1982
After many days of waiting, the markets were looking in this direction from the beginning of the eighth, today the data on US inflation for January came out. Growth was 7.5%at levels not seen since 1982, higher than the estimates of + 7.3% and the December figure of 7%.
Net of the more volatile components, such as food and energy, the growth in inflation was 6%, the estimate assumed a + 5.9%.
The Fed turns its guns
Loretta Mester, number one of the Federal Reserve Bank (Fed) of Cleveland, said yesterday that if inflation does not weaken this year, the central bank in Washington should realize faster hikes in the cost of money than it did in the previous tightening cycle. between 2015 and 2018. “I foresee that it will be appropriate to raise rates at a faster pace because inflation is significantly higher and labor markets are much tighter than in 2015, “Mester said, speaking at a virtual event at the European Economics and Financial Center in London. The exact pace, he added, will depend on the evolution of the economy.
Fed, 6 rate hikes expected in 2022
Such a strong figure has immediately shifted market expectations, until this morning the futures on Fed Funds gave only about 30% probability to a rate hike of 50 basis points in March, now that possibility is given at 50%. As far as the rest of the year is concerned, the same futures seem to indicate as probable a rise of one percentage point in the cost of money by July and a total of 6 rises in the course of 2022, starting in March.
Bond yields rise
These prospects had an immediate effect not only on US bonds, the yield of the 10-year Treasury rose more than 2%, at the highest in two and a half years, but also on euro area bonds. The yield of the Bund at 10 years it grew by 3 basis points to 0.24%, that on the Btp with the same maturity at 1.81%, with the result that the spread has also widened again.
Staying focused on the US market for a moment, it is also worth noting that the two-year yield has also risen, up to 1.47%, with the result that the spread between the 10 and 2-year maturities falls to the lowest from September 2020 to 52 basis points. The crushing of the curve is not good newsin fact, anticipates not only the rise in interest rates, which is already in effect, but also a slowdown in the economy.
The dollar does not take advantage
Also visible immediately the effect on the dollar, which fell against the euro from the 1.1450 area to 1.1375, but then the exchange rate returned almost to the starting point. But be careful, as long as the 1.15 area is not behind the slide towards 1.13 is always possible.
The EU Commission cuts GDP estimates
The icing on the cake, at least for what concerns the European markets, the revision by the EU Commission of the growth estimates for the European Union of 27 countries in 2022, lowered to 4% from 4.3% (+ 2.8% in 2023) after + 5.3% in 2021. The Eurozone will grow by 4% in 2022 but only 2.7% in 2023.
EU inflation expected to rise
The expectations on inflation deserve a deepening, the forecast of Brussels in fact is that inflation in the euro area reaches a peak of 4.8% in the first quarter of 2022 and then remains above 3% until the third quarter of the year. However, there is still the belief (hope?) Of a marked decline in the following months: “inflation is expected at 2.1% in the last quarter of the year, before falling below the target to 2% of the ECB for the whole of 2023 “.
The forecast is that inflation in the Eurozone will grow to 3.5% in 2022, to 3.9% in the EU, and then to drop to 1.7% in 2023 (1.9% in the EU). Previous estimates were for growth in the euro area in 2022 of 2.2% and 2.5% in the EU with a drop in 2023 to 1.4% for the euro area and 1.6% for the EU.
Until now, the official position of the ECB was that inflation would return towards 2% in the second half of the year, a hypothesis that is apparently no longer considered realistic. And this obviously means that the ECB will also be forced to raise rates (perhaps as early as July as many observers claim). In any case, if the Fed should actually intervene on rates 6 times between now and the end of the year the ECB, regardless of inflation levels, could not stand by and would be forced to intervene.
Bundesbank wants rate hike
Inside the ECB pressures are mounting to see a tightening of monetary policy. Wednesday the president of the Bundesbank Nagel, speaking to the German newspaper Die Zeit, stated that prompt action by the European Central Bank is required since “Bundesbank experts estimate that inflation in 2022 will be significantly higher than 4% on average in Germany”. Nagel added that if the situation does not change by March he will take sides in favor of the normalization of monetary policy, which translated means first. tapering then rate hike.
The stock markets remain strong
So the stock markets will be crashing after all this bad news. Wrong!
The main indices, in Europe and the USA, actually suffered a shake after the inflation data in the States but then recovered almost immediately. It’s early to sing victory, key resistances have not yet been overcome, but at least investors have shown they can keep their nerve.
Here are the levels to follow to understand where the stock market could go. S & P500resistance at 4600 points, on the 61.8% retracement (Fibonacci) of the downside from the January high, Nasdaq 100 resistance at 15200, 50% retracement of the downside from the highs of January, Dax at 15600, also in this case 50% retracement compared to the decline suffered since January, e Ftse Eb at 27360, a bearish trend line drawn from the January high. If the indices find the strength to leave these levels behind, it will be possible to derive a significant signal of strength. Otherwise, it is better to fasten your seat belts.