Will Eurozone Inflation Accelerate to New Highs?
Eurozone inflation has risen for 10 consecutive months, and most economists believe it will rise further. Annual consumer price growth is expected to accelerate in May to the highest level since the creation of the single currency in 1999.
The fallout from Russia’s invasion of Ukraine has sent energy and commodity prices soaring and exacerbated disruptions to global supply chains, while the lifting of Covid-19 restrictions has boosted demand across Europe. All of this pushes up inflation.
Economists polled by Reuters forecast on average a 7.7 percent rise in the euro zone’s unified consumer price index for the year to May when Eurostat releases the figures on Tuesday. That would be up from April’s record 7.4%.
Soaring inflation (Germany is expected to hit a new 40-year high of 8%) and a rise in France, Spain and Italy when national data are released on Monday and Tuesday prompted policymakers to promise an imminent reply.
ECB President Christine Lagarde said last week that the bank is on track to cut the deposit rate from minus 0.5 by September after an “unprecedented combination of shocks” pushed inflation well above its 2% target % to at least zero. .
Economists at Goldman Sachs recently forecast that the ECB will raise interest rates by 25 percentage points at each of its eight policy meetings between July and June, which would raise the deposit rate to 1.5 percent.
“While slower growth or persistent sovereign pressures could lead to a slowdown in policy normalization, more pronounced signs of inflationary impact may require a quicker exit,” they said. Martin Arnold
Will a strong jobs report renew pressure on the Fed to raise rates sharply?
U.S. economic data released this week showed signs of weakness, prompting investors to lower expectations for how much the Federal Reserve will raise interest rates this year. But another red-hot jobs report could quickly offset the move.
The Labor Department is expected to report Friday that the U.S. economy added 318,000 jobs in May, down slightly from 428,000 the previous month, according to a FactSet poll of economists. Meanwhile, the unemployment rate is expected to fall to its lowest level since February 2020. In addition, employment forecasts for three of the first four months were well below the reported numbers.
Evidence of continued upward pressure on wages could reignite inflationary concerns that are just starting to cool: market inflation gauges have fallen in recent weeks and consumer price growth slowed in April.
A strong report could also help the Fed reassure the U.S. economy that the U.S. economy is strong enough to withstand further sharp rate hikes. Bets on the Fed’s key December 2022 rate level fell to 2.6% this week from 2.8% after the Census Bureau reported a nearly 17% drop in new home sales in April and S&P purchasing managers’ index data showed growth in business activity slow down. The Fed’s main interest rate is currently set in a range of 0.75% to 1%. Kate Duguid
To what extent have rebalancing flows lifted global equities?
The FTSE global stock index fell 7% in May on its worst day of the month as worries about economic growth swirled in global trading desks. Those losses were largely erased by a sharp rebound over the weekend.
Upbeat earnings reports midweek from major U.S. retailers including Macy’s, Dollar Tree and Dollar General helped ease concerns that U.S. consumers, key to the world’s largest economy, were pulling their wallets away due to higher prices. A report on Friday showing that U.S. consumer spending rose more than expected in April helped support the argument.
That’s a good narrative, but at the same time, there may also be technical factors driving global stock markets’ recent gains. The sharp fall in the stock market earlier this month meant that funds targeting specific allocations to their portfolios — such as 60% equity funds, 40% bond funds — were out of the game. That means managers will have until the end of the month to buy stocks to rebalance their portfolios.
JPMorgan analyst Nikolaos Panigirtzoglou noted in early May that the topic of “rebalancing” has been a topic of discussion with clients lately.
“Given that a significant portion of the decline occurred in May, we expect substantial inflows into both the monthly rebalance fund at the end of the month and the quarterly rebalance fund at the end of the quarter,” he noted.
The bank estimates that balanced mutual funds will buy between $34 billion and $56 billion in equities before the month ends on Tuesday. U.S. corporate share buybacks have also “increased” in recent weeks, the bank said, and executives appear to be taking advantage of the dip to buy their own company shares. adam samson