Fed policymakers are again considering a rate hike to the 0.5% step. The ECB began to cut its balance sheet

March 2, 2023

According to ISM, the US Manufacturing Activity Index rose from 47.4 to 47.7 in February, slightly below expectations of 48.0. To understand what this index shows – any value above 50 signals growth in the sector, while values below this threshold indicate a contraction. The US manufacturing activity index has remained in falling territory for the fourth consecutive month, a sign that the economic outlook is challenging amid persistently high inflation and rapidly rising interest rates. While the manufacturing sector has been in recession since last November, the jump in prices suggests that inflation is likely to remain resilient in the coming months, raising the risk that the Fed could raise its final rate in its efforts to restore price stability. That could mean a 50 basis point interest rate hike at the March FOMC meeting, which would be a bullish catalyst for the US dollar and a bearish catalyst for stock indices.

As the stock market closed Tuesday, the Dow Jones Index (US30) increased by 0.02%, while the S&P 500 Index (US500) fell by 0.47%. The NASDAQ Technology Index (US100) closed negative by 0.66%.

Rafael Bostic, president of the Federal Reserve Bank of Atlanta, called for further interest rate hikes above 5% to get inflation back to the Central Bank’s target level. “I think we will need to raise the federal funds rate to 5-5.25% and leave it at that level until 2024,” Bostick said. Fed funds futures show that the final rate will reach the 5.5%-5.75% range by September 2023. Monthly labor market data and consumer price data in the coming days will help investors gauge the trajectory of rates ahead of the March 21-22 meeting.

Equity markets in Europe mostly fell yesterday. German DAX (DE30) decreased by 0.39%, French CAC 40 (FR40) fell by 0.46%, Spanish IBEX 35 (ES35) lost 0.82%, and British FTSE 100 (UK100) closed on the plus side by 0.49%.

The annual inflation rate in Germany remained at 8.7%, the same level as in January, according to the federal statistical agency Destatis. Pressure on prices also remains in other leading eurozone economies. Eurostat will release Eurozone inflation data today. Analysts forecast that overall inflation will fall from 8.6% to 8.3%, while core inflation will remain at an annualized rate of 5.3%.

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Bank of France Governor François Villeroy de Galleau said Wednesday in Paris that the ECB’s final rate should be reached no later than September. At the moment, the ECB’s final rate is expected to be 4.0%. Since yesterday, the ECB has started to reduce its balance sheet by an average of 15 billion euros a month. At the same time, Bundesbank President Nagel called for accelerating the pace of balance sheet reduction in the second half of the year.

British Prime Minister Rishi Sunak reached an agreement with the European Union on the status of Northern Ireland, which is expected to open more trade after Brexit between the EU and the United Kingdom.

Oil rises as record US oil exports offset rising inventories. The US crude exports reached a record 5.629 million barrels, with crude inventories up 1.2 million barrels in the last week. Another factor that supported oil price sentiment was China’s production data, which came in above expectations for January and served as an indicator of energy demand from the world’s largest crude oil importer.

Asian markets were rising yesterday. Japan’s Nikkei 225 (JP225) gained 0.26% on the day, China’s FTSE China A50 (CHA50) gained 1.36%, Hong Kong’s Hang Seng (HK50) jumped by 4.21% on the day, India’s NIFTY 50 (IND50) added 0.85%, and Australia’s S&P/ASX 200 (AU200) was positive by 0.09%.

China’s industrial sectors, as well as the service sector, are showing steady growth, which gives hope that the significant lifting of Covid restrictions has seriously boosted China’s economic move.

S&P 500 (F) (US500) 3,951.39 −18.76 (−0.47%)

Dow Jones (US30)32,661.84 +5.14 (+0.016%)

DAX (DE40) 15,305.02 −60.12 (−0.39%)

FTSE 100 (UK100) 7,914.93 +38.65 (+0.49%)

USD Index 104.42 −0.45 (−0.43%)

Important events for today:

– Eurozone Consumer Price Index (m/m) at 12:00 (GMT+2);
– Eurozone Unemployment Rate (m/m) at 12:00 (GMT+2);
– Eurozone ECB Monetary Policy Statement (m/m) at 14:30 (GMT+2);
– US Initial Jobless Claims (w/w) at 15:30 (GMT+2);
– US Natural Gas Storage (w/w) at 17:30 (GMT+2);
– US FOMC member Waller Speaks at 23:00 (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.

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Fed policymakers are again considering a rate hike to the 0.5% step. The ECB began to cut its balance sheet