The US Federal Reserve (Fed) currently seems to have reached a point where opinions on the future course of monetary policy diverge significantly within the top body of the central bank. Meanwhile, investors are becoming increasingly nervous against the backdrop of continuing uncertainty and the approaching "deadline" in the dispute over raising the debt ceiling in the US. Negative economic news, such as the decline in the Ifo business climate barometer or the more stubborn than expected inflation in the UK also had a negative impact on investors’ sentiment.
The next interest rate decision by the Federal Reserve on June 14 could well lead to a stalemate within the Council (FOMC), resulting in an interest rate pause. After the Fed raised interest rates at a rapid pace by a total of five percentage points since March 2022 in the fight against inflation and the key interest rate has now reached its highest level since 2006, the "hawks" and the "doves" now seem to be more or less in balance. On the one hand, inflation has already fallen significantly (but remains at too high a level) and, on the other hand, the risks of a recession have increased due to the regional banking crisis and the threat default in the United States.
On Wall Street, the nervousness is palpable. The Dow Jones Industrial closed 0.77% lower at 32'799.92 points and the S&P 500 fell 0.73% to 4'115.24 points. On the Nasdaq, the indices fell by around 0.5%. According to Republican negotiator Kevin McCarthy, the parties "are still far apart on some issues." The benchmark yield on ten-year US government bonds climbed to 3.74%.
Asia's stock markets joined the negative cues from overseas. Hong Kong's Hang Seng Index lost about 2% and fell to a two-month low. The markets on the Chinese mainland also traded in the red. The Shanghai Composite fell 0.5% and the Shenzhen Component fell 0.7%. Meanwhile, in South Korea, the central bank kept its key interest rate unchanged for the third consecutive day. The South Korean Kospi fell by 0.35%. Bucking the trend, the Nikkei 225 in Tokyo rose 0.55% today.
ECB President Christine Lagarde once again emphasised the central bank’s determination in the fight against inflation, which remains high. According to the latest results of the regular survey by the Munich-based economic research institute Ifo, the mood of German entrepreneurs clouded over again in May. This, however, after the most important German economic indicator had improved for six months in a row. The Ifo business climate barometer fell more than expected by 1.7 points to 91.7 (consensus 93.0).
In the UK, inflation weakened significantly in April. Year-on-year, consumer prices still rose by 8.7% compared to an inflation rate of 10.1% in March, and the record high of 11.1% registered in autumn 2022. This was mainly due to lower electricity and gas prices. Economists, however, had expected a stronger decline to 8.2%. On a monthly basis, UK consumer prices rose by 1.2% in April (consensus +0.7%), due to higher food prices. Also worrying is the unexpectedly sharp rise in the core inflation rate from 6.2% to 6.8% (consensus 6.2%). As a consequence, the Bank of England is expected to raise the key interest rate further on June 22 in view of the continued stubborn inflation.
Corporate news in focus: Generali Q1, Medtronic Q4, Fresenius Capital Markets Day and in the US Q1 figures from Best Buy and Costco Wholesale with its Q3 statement.
Economic data in focus: Germany GDP Q1 and GfK Consumer Climate for June (08:00 CET), France Business Climate May (08:45), US GDP Q1 and Initial Jobless Claims (14:30) and Pending Home Sales April (16:00).
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi
Source: LGT Bank (Switzerland) Ltd.