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LGT Navigator: Inflation fuels worries about accelerating rate hikes

February 11, 2022

Following the latest inflation data from the US, financial markets expect the Federal Reserve to raise interest rates quickly. Wall Street reacts with losses. In Europe, meanwhile, ECB chief Christine Lagarde is trying to dampen inflation fears. 

Inflation fears

In the United States, prices are rising faster than expected. Inflation in January rose by +7.5% compared to the same month last year, as the Labor Department announced on Thursday. This is the highest inflation rate since 1982. Analysts had expected a price increase of +7.3%, after inflation in December was already at +7.0%. 

On Wall Street, the latest inflation data caused a sell-off and fueled fears that the Federal Reserve will raise interest rates faster than previously expected. In fact, James Bullard, president of the St. Louis Fed, called for a rate increase of 1 percentage point by July after the release of the numbers. The CME futures exchange puts the probability of a 50-basis-point hike in March at nearly 100%. In addition, financial markets now expect seven rate hikes this year.

The S&P 500 finally lost -1.8% on Thursday and the Dow Jones declined almost -1.5%. Technology stocks posted the biggest losses and the Nasdaq 100 fell -2.3%. The imminent turnaround in interest rates is also causing a stir on bond markets. Yields on ten-year US government bonds climbed for the first time since mid-2019 to over 2%. Two-year US Treasuries gained up to 26 basis points during the day, the biggest intraday jump since 2009.

ECB chief Lagarde dampens inflation worries

Meanwhile, in Europe, ECB President Christine Lagarde is trying to calm inflation concerns. In an interview, she said there is currently no evidence that rising prices are spilling over into wage demands. Such a spiral could further fuel price growth. She also defended the ECB's monetary policy, saying the central bank is making progress toward achieving the 2% inflation target. But that would only happen gradually. According to Lagarde, consumers must nevertheless prepare for inflation in the eurozone to remain high in the coming months. Later in the year, price growth is expected to slow down, says the ECB chief.

EU Commission raises inflation forecast

Prices in the eurozone are likely to rise faster than previously expected in the current year, the EU Commission forecasts. According to the experts, inflation will rise an average of +3.5% in 2022, as shown in the annual winter forecast. In the fall, they had expected a price increase of +2.2%. In 2023, a plus of +1.7% is anticipated. Prices in the European currency area have recently risen unexpectedly rapidly, fueled in particular by high energy costs. The European Central Bank has so far maintained its loose monetary policy, although it no longer rules out an interest rate hike in the current year. 

In addition, the EU Commission has reduced its economic expectations for the eurozone and now expects economic growth of +4.0% this year (previously +4.3%). In doing so, it refers to the high corona infections, rising energy prices and bottlenecks in the supply chains. In 2023, economic output is expected to grow by +2.8%.

Swedish central bank remains relaxed

The Swedish central bank wants to take its time with the first interest rate hike. Although annual inflation is well above the inflation target of 2% at around +4%, the Swedish central bank does not intend to raise the key interest rate until the end of 2024. Until then, the the rate will remain at zero, it announced on Thursday. In addition, the central bankers don’t want to reduce the central bank balance sheet yet. Thus, the Riksbank is taking a different path than the Federal Reserve and also the ECB, which recently expressed concern about high inflation. The Swedish monetary watchdogs attribute the rapidly rising prices to the high cost of energy. The core rate is just under 2%, the central bank explained.

  

Economic Indicators February 11

MEZ Country Indicator Last period
08:00 GE Consumer prices (January, y/y) +4.9%
08:00 UK Gross domestic product (Q4, y/y) +6.4%
08:30 CH Consumer prices (January, y/y) +1.5%
14:30 US Consumer confidence (February) 67.50

 

Earnings Calender February 11

Country Company Period
UK BAT Q4
SZ Bell Q4
US Under Armour Q4

 

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

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