The Fed will not return to aggressive rate hikes. Inflation in the Eurozone is rising again

March 3, 2023

The US Treasury bond yields fell sharply yesterday after Atlanta Federal Reserve President Rafael Bostic ruled out a return to more aggressive Fed rate hikes and said the central bank would suspend its tightening efforts by mid to late summer. This brought optimism back to the stock market. As the stock market closed Thursday, the Dow Jones Index (US30) increased by 1.05%, and the S&P 500 Index (US500) added 0.76%. The NASDAQ Technology Index (US100) closed positive by 0.73%.

According to the US Department of Labor, initial jobless claims fell by 2,000 to 190,000 last week. Separate data showed that labor costs per unit rose 3.2% year-over-year in the fourth quarter, nearly three times the preliminary estimate. The figures underscore the steady strength of the labor market.

Wells Fargo has pushed back its US recession forecast and now expects an economic slowdown in the second half of the year and expects interest rates to remain high for an extended period.

Macy’s (M) reported quarterly earnings that beat expectations, sending the department store chain’s stock up more than 10%.

Stock markets in Europe were mostly up yesterday. German DAX (DE30) gained 0.15%, French CAC 40 (FR40) jumped by 0.69%, Spanish IBEX 35 (ES35) added 0.02%, and British FTSE 100 (UK100) closed yesterday with a 0.37% gain.

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The latest Eurozone inflation data showed that inflationary pressures remain elevated. The annualized consumer price index fell from 8.6% to 8.5%, but core inflation (excluding food and energy prices) unexpectedly rose from 5.3% to 5.6%. ECB meeting minutes on Thursday showed that the central bank would continue to raise interest rates after its March meeting. Analysts are currently forecasting a 0.5% ECB rate hike both at the March meeting and in May and another final 0.25% hike in June.

Oil prices rose Thursday, helped by signs of a strong economic recovery in China, the biggest importer of crude oil, and easing fears of aggressive rate hikes in the United States.

As the Federal Open Market Committee (FOMC) nears a peak in interest rates this summer, investors are starting to invest in gold. Gold is inversely correlated to government bond yields, which rise as interest rates rise. Therefore, a peak in rates would end the uptrend in yields, which would return fundamental support to the precious metals.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.06% for the day, China’s FTSE China A50 (CHA50) fell by 0.32%, Hong Kong’s Hang Seng (HK50) was down by 0.92% for the day, India’s NIFTY 50 (IND50) lost 0.74%, and Australia’s S&P/ASX 200 (AU200) was positive by 0.05%.

Japanese bond yields remain high as the Bank of Japan is unwilling to change its soft monetary policy. Incoming BOJ Governor Kazuo Ueda said that now might not be the time to abandon current monetary policy given the current economic circumstances, a sign that the BoJ plans to stick with large-scale quantitative easing for the foreseeable future without making major adjustments to yield curve controls. The latest economic data showed that Tokyo’s core inflation rate fell from 4.3% to 3.3% year-over-year, and the unemployment rate also showed a decline from 2.5% to 2.4%. Such macro statistics are good for the BoJ in terms of maintaining stimulus.

S&P 500 (F) (US500) 3,981.35 +29.96 (+0.76%)

Dow Jones (US30)33,003.57 +341.73 (+1.05%)

DAX (DE40) 115,327.64 +22.62 (+0.15%)

FTSE 100 (UK100) 7,944.04 +29.11 (+0.37%)

USD Index 104.42 −0.45 (−0.43%)

Important events for today:

– Japan Tokyo Core CPI (m/m) at 01:30 (GMT+2);
– Japan Unemployment Rate (m/m) at 01:30 (GMT+2);
– Japan Services PMI (m/m) at 01:30 (GMT+2);
– German Services PMI (m/m) at 10:55 (GMT+2);
– Eurozone Services PMI (m/m) at 11:00 (GMT+2);
– UK Services PMI (m/m) at 11:30 (GMT+2);
– Eurozone Producer Price Index (m/m) at 12:00 (GMT+2);
– Canada Building Permits (m/m) at 15:30 (GMT+2);
– US ISM Services PMI (m/m) at 17:00 (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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The Fed will not return to aggressive rate hikes. Inflation in the Eurozone is rising again