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German inflation, wage data stoke concerns about rate cuts

Traders were concerned about the pace of potential rate cuts by the European Central Bank (ECB) this year following a hot inflation reading and wage increases released out of Germany on Wednesday. The sentiment was already negative regarding future interest rate cuts by the Federal Reserve (Fed), leading equity markets around the globe to slide deep into the red midweek.

Shane Strowmatt, LGT
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5 minutes
Made in Germany
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Inflation in Germany sped up for a second month in a row in May. The German Consumer Price Index rose by 2.8% when compared with the same month a year earlier, faster than the 2.4% rate in April and higher than economists’ expectations. Inflation data from the euro area is due out on Friday before the ECB – which has a 2% inflation target – announces its monetary policy decision next week. Market participants expect the central bank to begin lowering interest rates, but a pick-up in inflation could slow the pace of further rate cuts.

Exacerbating worries that the ECB could be on a slower-than-expected path for rate cuts were strong wage increases out of Germany. Workers in Europe’s largest economy received 3.8% higher wages in the first quarter of the year. Wage increases put more money in the pockets of consumers and more spending could slow the pace of easing inflation in Europe. Following the release of German inflation and wage data on Wednesday, yields on German government debt reached their highest levels in about six months. The Euro Stoxx 50 dropped 1.3% and Germany’s DAX closed the mid-week session 1.1% lower.

In New York, stock indices dropped on Wednesday. The release of the Fed’s Beige Book had little effect on markets, which were already concerned about the timeline for interest rate cuts by the Fed. The Dow Jones Industrial fell 1.1% and the S&P 500 dropped 0.7%. The Nasdaq-100 also lost 0.7%.

In individual stocks, ConocoPhillips agreed to acquire Marathon Oil for roughly USD 17 billion. The move follows similar acquisitions last year by peers Exxon Mobil, which took over Pioneer Natural Resources, and Chevron, which bought Hess. ConocoPhillips shares slipped 3.1% and Marathon shot up 8.4% on Wednesday.

In the Asia-Pacific region, stock markets followed Wall Street down. In Tokyo, the Nikkei 225 slumped 1.6% and South Korea’s Kospi dropped 1.3%. In Australia, the S&P/ASX 200 fell 0.6%. Hong Kong's Hang Seng Index lost 1.3%, while the Shanghai Composite was trading 0.5% lower. On Friday, a string of data out of Asia could swing markets with industrial production figures due from Japan and South Korea, as well as the official Purchasing Managers Index from China. Tokyo inflation data is also set for release on Friday.

Corporate news in focus: Quarterly figures from Costco.

Economic data in focus: Swiss trade balance, Swiss gross domestic product, euro-area business and consumer survey results, US gross domestic product, US weekly initial jobless claims, US existing home sales.


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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.

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