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Further decline in US inflation could provide relief for the Fed

Equity markets continued their recovery after the price losses of the last few days, which were driven by turbulence in the banking sector. Investors found support in the assumption that the Federal Reserve will raise interest rates only moderately, if at all, at the monetary policy decision due next week. The reason for this is, on the one hand, the potential danger of a widening crisis in the financial system due to the collapse of Silicon Valley Bank and, on the other hand, the data published yesterday on the inflation trend in the US.

Alessandro Fezzi, LGT
Tempo di lettura
5 minuto
US Consumer Prices
© Shutterstock

On Wall Street, share prices stabilized on Tuesday. The Dow Jones Industrial closed at 32,155.40 points 1.06% higher than the previous day and the S&P 500 went out up 1.68% at 3,920.56 points. On the Nasdaq technology exchange, the indices rose by about 2.3%. The mood was driven primarily by the recovery in the banking sector. For example, the shares of troubled First Republic Bank rose by about 25%. But also shares of supra-regional banks such as JPMorgan and Goldman Sachs or Bank of America, Citigroup and Wells Fargo increased. Stock market sentiment was also supported by hopes that the Fed would reduce the pace of interest rate hikes due to possible distortions in the financial system.

The further decline in inflation in the US also provided positive impetus for stock markets. In February, consumer prices rose by 6.0% over the year. In January, inflation was still 6.4%. The core inflation rate, i.e. excluding volatile energy and food prices, was 5.5%, compared with 5.6% at the beginning of the year. The Federal Reserve may have now gained some leeway to possibly loosen the reins somewhat, i.e. take a break in the current interest rate cycle and first observe the further development of inflation.

Nevertheless, the benchmark yield on ten-year US government bonds rose again from around 3.5% to 3.68%. 

In Asia, equity markets trended upwards midweek, after bank stocks on Wall Street had recovered. Hong Kong's Hang Seng index rose 1.3%, leading gains across the region. The Hang Seng tech index rose 1.9%. In Tokyo, the Nikkei 225 was virtually unchanged after early gains melted away. In mainland China, the Shanghai Composite gained 0.6% and the Shenzhen Component added 0.3%. The People's Bank of China left its medium-term lending rate unchanged at 2.75%.

Corporate news in focus today: K+S, E.ON, BMW, Volkswagen core brand VW Passenger Cars and Prudential with annual figures. Hennes & Mauritz reported Q1 sales and in the US Adobe will release its Q1 numbers.

Economic data in focus today: Ifo economic forecast for Germany (10:30 CET) and from the US retail sales and producer prices for February and the Empire State Index for March (both 14:30).

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