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LGT Navigator: US inflation drives the Fed

June 13, 2022

The consumer price data from the US published on Friday provide the Federal Reserve with the template for the next interest rate hike anticipated on Wednesday. The Fed could well increase the pace of monetary tightening and a significant interest rate hike is to be expected. As a result, inflation and economic concerns remain dominant on the capital markets, and consumer confidence, not only in the United States, has been shaken by strong price inflation.

US inflation drives the Fed

On Wall Street, the even heightened inflation concerns weighed on prices. The Dow Jones Industrial lost on Friday -2.73% and went out at 31'392.79 points. Thus, the leading index recorded a loss of almost -5% on a weekly basis. The S&P 500 fell by -2.91% to 3'900.86 points and on the Nasdaq, the technology indices fell even more sharply by around -3.5%. In view of the strong inflationary pressure, the Federal Reserve will have no choice but to further increase interest rates and thus further tighten financing conditions for companies. As a result, bank stocks recorded significant losses on Friday, as the key interest rate hikes will put the brakes on demand for credit. The US dollar benefited from the prospect of rapidly rising interest rates. The greenback pushed the euro in the direction of 1.05. The bitcoin fell at times at the start of the week to the lowest level since December 2020. Meanwhile, on the bond market, the yield for ten-year US government bonds climbed to 3.17% – the highest level since the end of 2018.

Asia is also dominated by fears of further sustained inflation, rising interest rates, and weakening of the global economy. In Tokyo, the 225-stock Nikkei Index collapses by almost -3% at the beginning of the week, and in Hong Kong, the Hang Seng Index also falls by more than -3%. In Shanghai Composite index records a daily loss of about -1%.

Cost of living in the US rises more sharply than at any time since 1981

The US inflation rate rose to +8.6% in May, the highest level in over 40 years. Inflation was thus even stronger than analysts had expected. The consensus was +8.3% after +8.1% in April. Given the continued strong inflationary pressures, the Fed will be forced to raise interest rates quickly and sharply.

US consumer sentiment falls to record low

High inflation is also putting increasing pressure on the mood of American consumers. The confidence barometer of the University of Michigan, for example, slumped much more sharply than expected from 58.4 to 50.2 points (consensus 58.1). Above all, the significant rise in gasoline prices is weighing on private households.

Inflation expectations in Germany continue to rise

According to the Bundesbank, consumer inflation expectations in Germany have risen further. Expected inflation for the next twelve months increased from +6.9% to +7.0%, more than doubling year-on-year.

Russia's central bank cuts key interest rate again

Against the background of the war in Ukraine and the sanctions imposed by the West, the Russian central bank has again eased its monetary policy. The key interest rate was cut by 150 basis points to 9.5%, making the interest rate easing somewhat stronger than expected. The Bank of Russia argued that inflation had weakened more than expected and at the same time economic growth had declined less than feared in April. The inflation rate was +17.1% in May.

Economic Indicators June 13

MEZ Country Indicator Last period
08:00 UK Industrial Production (April, m/m) -0.2%
13:00 ESP Consumer Confidence (June) 74.6

 

Earnings Calender June 13

Country Company Period
NL ING Investor Day
US Oracle Q4

 

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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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