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LGT Navigator: Hope for declining inflation supports Wall Street

September 13, 2022

US equity markets on Monday continued their gains of the previous week. The focus of interest now moves to this afternoon's upcoming US inflation data. After a slight easing in July, investors are hoping for a further decline in consumer prices in August. A slowdown in inflation momentum could possibly prompt the Federal Reserve to slow down its monetary tightening course somewhat.

Hope for declining inflation supports Wall Street

On the New York Stock Exchange, the recovery continued at the beginning of the week. The Dow Jones Industrial gained +0.71%, closing at 32'381.34, and thus recorded the fourth winning day in a row. The S&P 500 closed at 4,110.41 points, +1.06% firmer. On the Nasdaq technology exchange, the indices rose by about +1.2%. Support came mainly from price gains at Apple. Figures on pre-orders for the new iPhone 14 let the stock rise by almost +4%. Meanwhile, the yield of ten-year US government bonds held at 3.35%.

Whether the upward trend on Wall Street will continue, however, is questionable. Thus, equity analysts have reduced their forecasts for the third quarter significantly and lowered the earnings estimates for the S&P 500 companies since the end of June by 5.5 percentage points, according to data service provider FactSet. Corporations are also more skeptical about the future. In fact, 240 of the 500 S&P companies mentioned a recession in their second-quarter earnings conference calls – the most since data collection began in 2010. Despite the recent rally, the S&P 500 is down about -15% year-to-date. The Dow Jones is trading about -12% weaker than at the start of the year.

Asia-Pacific stock markets traded higher on Tuesday. In Tokyo, the Nikkei 225 traded around +0.2% higher. South Korea's Kospi rose about +2.6% as trading resumed after Monday's holiday, led by Samsung Electronics, which gained +4.5%. In mainland China, the Shanghai Composite trades about +0.3% higher and in Hong Kong, the Hang Seng Index gains about +0.4%. The broadest MSCI index for Asia-Pacific equities outside Japan is up about +0.7%.

Ifo Institute expects recession in winter

The Ifo Institute expects prices in Germany to continue to rise and economic output to contract. For this year, the Munich-based economists forecast an inflation rate of +8.1%, followed by +9.3% next year. The German economy should grow by +1.6% in 2022 before contracting by -0.3% in 2023, the Ifo economic forecast says. “We are heading into a winter recession,” said Timo Wollmershäuser, head of Ifo economic research. The trigger for the difficult economic situation is the energy crisis. For example, the Munich-based institute expects electricity and gas prices to rise sharply in early 2023, fueling inflation in Germany once again. This is likely to reduce purchasing power, which will not be cushioned even by the relief packages that have been agreed. “The loss of purchasing power, measured by the decline in real per capita wages, is higher than at any time since the start of today's national accounts in 1970,” Wollmershäuser explained. However, the Ifo Institute does not expect any serious impact on the labor market. The economic situation in Germany is not expected to normalize until 2024. The economists forecast growth of +1.8% and inflation of +2.5%.

UK economy stagnated in the third quarter

The British economy performed less well than expected in the past quarter. Thus, growth from May to July stagnated compared to the previous quarter, after a plus of +0.3% in the first quarter, the statistics office announced on Monday. Analysts had expected an expansion of +0.1% in the second quarter. The UK economy has been losing momentum since the beginning of the year as rapidly rising prices weigh on consumers and businesses. As a result, annual inflation reached its highest level in forty years in July (+10.1%). New Prime Minister Liz Truss announced last week that household energy costs will be capped at an average of GBP 2500 per year over the next two years. However, economists are divided on whether this will be enough to ease the burden on people. Because at the same time, it is considered certain that the Bank of England (BoE) will tighten interest rates again next week. The financial markets expect the BoE to raise the key interest rate by a further 75 basis points from its current level of 1.75% – this would be the seventh interest rate hike in a row.

Economic Indicators September 13

MEZ Country Indicator Last period
08:00 GE Consumer price index (August, y/y) +7.9%
08:00 CH Producer price index (August, y/y) +5.7%
11:30 EZ ZEW economic sentiment (September) -54.9
14:30 US Consumer price index (August, y/y) +8.5%

 

Earnings Calender September 13

Country Company Period
US Twitter extraorord general meeting
US Starbucks Investor Day

 

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Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

 

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