The Reserve Bank of Australia raised its inflation forecasts. Stock indices are once again under pressure from hawkish statement

By JustMarkets

On Thursday, Federal Reserve officials continued to impose their hawkish message on the market. The main message from policymakers is that further rate hikes are not far off and that the rate should remain high for an extended period. While there is nothing new in these comments, the 2-10 Treasury yield curve has flipped by 85 basis points, the deepest inversion since the early 1980s, raising new fears about economic problems. As the stock market closed Thursday, the Dow Jones Index (US30) decreased by 0.73%, and the S&P 500 Index (US500) fell by 0.88%. The NASDAQ Technology Index (US100) lost 1.02% yesterday.

Walt Disney announced a restructuring plan that will include cutting 7,000 jobs, which could result in about $5.5 billion in savings. PayPal Holdings Inc (PYPL) released a report Thursday with fourth-quarter results that beat analysts’ forecasts. Shares of PayPal Holdings Inc jumped by 7.04% after the market close. LYFT (LYFT) released a report Thursday with fourth-quarter results that disappointed analysts. The company’s stock fell more than 22% on the report.

Stock markets in Europe were mostly up yesterday. Germany’s DAX (DE30) gained 0.33%, France’s CAC 40 (FR40) gained 0.96%, Spain’s IBEX 35 Index (ES35) added 0.18%, and the British FTSE 100 (UK100) closed up by 0.33% on Thursday.

According to the latest report from the National Institute of Economic and Social Research (NIESR), sluggish growth and persistent inflation will continue to hurt British households this year. NIESR expects UK GDP for the fourth quarter to show a 0.3% contraction. Bank of England Governor Andrew Bailey urged workers and employers to consider this year’s expected sharp drop in inflation when discussing wage settlements. Bailey told a parliamentary committee Thursday that the continued tightening reflects the Monetary Policy Committee’s concern about continued inflation and the need to see more evidence of easing in the labor market. The bank expects inflation to begin to decline rapidly from the middle of 2023 and, by the end of the year, will be about 4% due to sharp declines in wholesale energy prices, a sharp drop in import prices, and falling demand due to declining personal income.

On Wednesday, the US Energy and Information Administration (EIA) announced that weekly crude oil inventory levels reached their highest level since June 2021. Production reached a high last seen in April 2020. Despite the rise in inventories, oil continued to rise yesterday. The optimism about growth is due to increased demand from China after Fitch Ratings raised China’s economic growth forecast for 2023 to 5% from the previous figure of 4.1%. Fitch cited January services PMI data as well as Q4 2022 real GDP as reasons for the increase.

Asian markets were also mostly up yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.08% yesterday, China’s FTSE China A50 (CHA50) added 1.24%, Hong Kong’s Hang Seng (HK50) increased by 1.60% for the day, India’s NIFTY 50 (IND50) was up by 0.12%, and Australia’s S&P/ASX 200 (AU200) was down by 0.53% for the day.

The appointment of Haruhiko Kuroda’s successor will probably take place next week. Several representatives of the Liberal Democratic Party have said that opposition would arise within the party if the prime minister of Japan chose Yamaguchi, the former deputy governor of the Bank of Japan. Yamaguchi’s name was recently ranked third in polls of economists as a likely candidate for governor of the Bank of Japan. Yamaguchi, in comparison with other contenders for the top post, is considered more hawkish. If he is appointed, market participants expect it to cause significant market volatility and signal that the government is committed to a clear change in policy toward normalization.

Australia’s Central Bank (RBA) on Friday revised its forecasts for core inflation and wage growth upward and warned of further interest rate hikes, raising the risk of the economy sliding into recession. Given the importance of preventing a price-wage spiral, the council will continue to pay close attention to labor market data. Annual wage growth is expected to peak at 4.2% later this year, up from the previous forecast of 3.9%, and then decline to 3.8% by mid-2025. The unemployment rate will rise steadily to 4.4% by mid-2025 from the current 3.5%. The RBA also raised this year’s economic growth forecast to 1.6%, up from 1.4% previously. All of these forecasts are based on the assumption that interest rates will peak at about 3.75% in mid-2023 and then decline to about 3% by June 2025.

S&P 500 (F) (US500) 4,081.50 −36.36 (−0.88%)

Dow Jones (US30) 33,699.88 −249.13 (−0.73%)

DAX (DE40) 15,523.42 +111.37 (+0.72%)

FTSE 100 (UK100) 7,911.15 +25.98 (+0.33%)

USD Index 103.22 -0.19 (-0.18%)

• – Japan Producer Price Index (m/m) at 01:50 (GMT+2);
• – Australia RBA Monetary Policy Statement at 02:30 (GMT+2);
• – China Consumer Price Index (m/m) at 03:30 (GMT+2);
• – China Producer Price Index (m/m) at 03:30 (GMT+2);
• – UK GDP (q/q) at 09:00 (GMT+2);
• – UK Industrial Production (m/m) at 09:00 (GMT+2);
• – UK Manufacturing Production (m/m) at 09:00 (GMT+2);
• – Canada Unemployment Rate (m/m) at 15:30 (GMT+2);
• – US Michigan Consumer Sentiment (m/m) at 17:00 (GMT+2);
• – US FOMC Member Waller Speaks at 19:30 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.