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Fed decision due amid banking uncertainty, high inflation

Investors are nervous ahead of key central bank decisions this week with equity markets falling on Tuesday. The US Federal Reserve (Fed) is set to release its interest rate decision Wednesday evening amid instability in the financial sector, concerns about the US debt ceiling and weak economic data. Despite market nervousness, the Fed is largely expected to increase its key policy rate by another 25 basis points, which would be its tenth increase in a row. A day later, the European Central Bank (ECB) is also expected to continue raising rates.

Shane Strowmatt, LGT
Tempo di lettura
5 minuto

One the one hand, the Fed will have to consider the effects of further hikes on the financial sector. High rates have been blamed at least in part for the failure of three US banks already, with more lenders coming under pressure on Tuesday. Shares in regional banks PacWest and Western Alliance dropped 28% and 15% in Tuesday trading. On the other hand, inflation remains sticky in the US, with the Fed’s preferred gauge of inflation - the core personal consumption expenditures price index, which excludes volatile food and energy prices - up 4.6% in March versus the same month a year earlier. That number is clearly higher than the Fed’s target of 2%, suggesting more hikes may be necessary before the central bank can declare victory over inflation. Job opening data also pointed to a weak picture of the labour market on Tuesday. Job openings totaled 9.59 million in March, the third month that the number of open positions has fallen and the lowest level since May 2021.

Equity markets in New York reacted negatively ahead of the Fed decision. The Dow Jones Industrial lost 1.08% to end the day at 33,684.53 points and the S&P 500 dropped 1.16% to close at 4,119.58 points. The tech-heavy Nasdaq indices lost almost 1%.

The negative sentiment spilled over to Asia as well. Hong Kong’s Hang Seng Index lost 1.75% and the Hang Seng Tech index fell 2.38%. South Korea’s Kospi slipped about 1% and Australia’s S&P/ASX 200 lost 1.46%. In mainland China and Japan, markets were closed for a holiday on Wednesday.

In Europe on Tuesday, inflation came in at 7% for April when compared to the same month a year earlier, which is slightly higher than the 6.9% figure in March. Core inflation - which excludes food and energy prices - was 5.6% in April. The data, which was near market expectations, do not give a clear signal as to how the ECB will act when announcing its policy rate decision on Thursday. Market participants largely expect the central bank to continue hiking rates but are divided on whether to expect a 25-basis-point or 50-basis-point move. Data on bank lending released Tuesday, however, clearly supported the case for a slower rate hike. The ECB’s Bank Lending Survey showed credit standards tightened substantially in the first quarter of the year and demand from firms for loans dropped the most since the Global Financial Crisis.

Corporate news in focus: Q1 figures from BNP Paribas, Lufthansa, Deutsche Post, Stellantis, Porsche, Kraft-Heinz, Qualcomm and annual General Meetings at Mercedes-Benz, Unilever, Barclays.

Economic data in focus: Eurozone unemployment for March (11:00 CET) and Fed interest rate decision (20:00).

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