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LGT Navigator: Inflationary pressure in the US continues to increase, keeping the Fed on track

March 11, 2022

In the United States, the cost of living continued to rise sharply in February. Over the year, the inflation rate almost reached eight percent, the highest level since 1982. This does not even consider the effect of the Ukraine war and the recent massive increase in commodity prices. The Federal Reserve is expected to respond as early as next week with its first interest rate hike. Rising inflationary pressure is also a concern for the ECB, which intends to end its bond purchases somewhat earlier than previously targeted and is thus slightly more restrictive. The direct talks between Russia and Ukraine, which again ended without any tangible results, caused disappointment.

Inflationary pressure in the US continues to increase, keeping the Fed on track

Consumer prices in the United States rose by +7.9% year-on-year in February, driven by sharp increases in energy prices - in February, the energy component rose by almost +26% year-on-year. The inflation rate is thus the highest it has been in 40 years. The core rate, i.e. excluding energy and food prices, was +6.4%. The interest rate turnaround in the US can thus no longer be stopped, and the Fed will raise its key rate by at least 25 basis points next Wednesday, March 16, for the first time since the corona pandemic.

As in Europe – the EuroStoxx 50 closed -3% lower at 3'651.39 points – stock prices on Wall Street fell again on Thursday. However, the Dow Jones Industrial went out with a relatively small daily loss of -0.34% at 33'174.07 points. On the one hand, the further rising inflationary pressure in the US caused concern and on the other hand, the summit meeting between Russia and Ukraine brought no rapprochement. The S&P 500 closed -0.43% lower at 4'259.52 points and on the technology exchange Nasdaq indices fell by a good -1%. In the center of interest now moves the monetary policy decision of the Federal Reserve next week. The yield of ten-year US government bonds climbed meanwhile to just under 2%. 

In Asia, the stock indices followed the negative guidance from overseas and tended to close the week in negative territory. In Tokyo and Hong Kong, the indices lose about -2%.

ECB treads gently on the brakes despite geopolitical uncertainties

As expected, the European Central Bank (ECB) left key interest rates unchanged at a record low. On the other hand, however, the volume of the APP bond purchase program is now to be reduced as early as the end of June, which would put an end to purchases altogether in the third quarter of this year. This means that the ECB's monetary policy will become slightly more restrictive in view of the persistently high inflationary pressure – the inflation rate in the euro area is currently +5.8% – and despite the risks arising from the Ukraine war. ECB President Christine Lagarde expects “significant effects on economic growth and inflation” because of the war in Ukraine. The economy will be dampened by the sharp rise in commodity and energy prices, she said. At least the easing of the pandemic and an easing of supply bottlenecks should provide some support.

Significant adjustment of ECB inflation and growth forecasts

Against the background of the war in Ukraine, the economic outlook for the eurozone has clouded over. As a result, the ECB reduced its GDP forecast for the current year to +3.7% from +4.2% (in December). For 2023, the ECB now assumes +2.8% instead of +2.9%, and in 2024 the forecast is unchanged at +1.6%. At the same time, given higher energy prices, inflation in the eurozone is now expected to reach +5.1% in the current year. This is a massive shift from the December forecast of +3.2%. Next year, inflation is expected to fall to +2.1% (previously +1.8%).

Top-level meeting between Russia and Ukraine ends without tangible results

The first direct talks between Russian Foreign Minister Sergei Lavrov and his Ukrainian counterpart Dmytro Kuleba in Turkey ended yesterday without any presentable results, disappointing hopes for an early end to the war. The Kremlin is said to continue to insist that Ukraine declare itself neutral in its constitution and recognize the annexed Black Sea peninsula of Crimea as Russian and the separatist regions of Luhansk and Donetsk as independent states. Lavrov, meanwhile, accused the West of exacerbating the conflict by supplying weapons to Ukraine. At least, he said, direct talks were to be continued in principle.

Further measures against the Kremlin under discussion

US President Joe Biden is considering to withdraw Russia's so-called “preferred trade status”. That would put US trade relations with Russia in the same category as Cuba or North Korea. Biden addresses the US Congress today at 4:15 p.m. CET. Meanwhile, in Brussels, EU leaders are discussing the way forward in the Ukraine crisis. A ban on imports of oil, gas and coal from Russia seems to be gaining more and more support.

  

Economic Indicators March 11

MEZ Country Indicator Last period
08:00 UK Industrial Production (January, m/m) +0.3%
08:00 GE Consumer Prices (February, y/y) +5.1%
09:00 ESP Consumer Prices (February, y/y) +6.2%
16:00 US Consumer Sentiment (March) 61.8

 

Earnings Calender March 11

Country Company Period
GE Lanxess Annual

 

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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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