Persistent inflation in the US heightened investors' fears of an aggressive monetary tightening

The Dow Jones Index (US30) fell to a fresh yearly low yesterday as CPI data showed that inflation remains near a 40-year high. The US inflation rate fell to 8.3% from 8.5%, but the data was worse than analysts' expectations of 8.1%. Fed officials indicate that inflation has been more resilient, and more action may be needed. Last week, Fed Chairman Jerome Powell said that the Fed is not seriously considering a 75 basis point hike at its next two meetings. But after yesterday's inflation report, policymakers' opinions may change. Persistent inflation in the US has increased investors' fears about an aggressive monetary policy tightening, so the stock market saw another sell-off yesterday. At the close of the stock market yesterday, the Dow Jones index (US30) decreased by 1.02%, the S&P 500 index (US500) fell by 1.65%, and the technology index NASDAQ (US100) lost 3.18%. Analysts believe that the US Federal Reserve maintains a fine line between pushing the economy into recession and lowering inflation.

Major European indices closed in the green zone yesterday. Germany's DAX (DE30) gained 2.17%, France's CAC 40 (FR 40) jumped by 2.50%, Spain's IBEX 35 (ES35) added 2.13%, and Britain's FTSE 100 (UK100) increased by 1.44%. The UK GDP in the last month decreased by 0.1%, while production also declined by 0.2%. Britain slowly moved toward stagflation (slowing economic growth with high inflation). Analysts believe that the Bank of England failed in its forecasting and has completely misinterpreted the causes of inflation. In a speech yesterday, ECB head Christine Lagarde said that the Russia-Ukraine war had exacerbated all the major drivers of inflation, as well as increased economic uncertainty and clouded growth prospects. This has further complicated the situation facing monetary policy, as inflation and economic growth move in opposite directions in the short term. Since last December, the ECB has begun to move toward gradual policy normalization. According to several indicators, inflation expectations are at or above 2%. ECB inflation forecasts increasingly indicate that inflation will be on target level in the medium term.

Finland is expected to announce its intention to join NATO today, while Sweden is likely to announce its intention a little later, EU diplomats and officials said. Russia's invasion of Ukraine is changing European security. This move is likely to further anger Russia, as Moscow has repeatedly warned Finland and Sweden against joining NATO, threatening severe military and political repercussions. In the wider Scandinavian region, Norway, Denmark, and the three Baltic countries are already members of NATO.

In southern Ukraine, where Russia has seized some territory, Moscow plans to hold a fake referendum on independence or annexation to make its occupation permanent. Russian forces also continue to shell the Azovstal steel plant in the southern port of Mariupol. Ukraine claims that tens of thousands of people have probably been killed in Mariupol. Between 150,000 and 170,000 of the city's 400,000 inhabitants still live in the city, which the Russian army has destroyed.

US commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 8.5 million barrels from the previous week. This week, oil prices are under pressure along with global financial markets due to concerns about rising interest rates, the strongest US dollar in two decades, inflation, and a possible recession. Prolonged quarantine measures over COVID-19 in China, the world's largest importer of crude oil, have also affected the market. The EU is still haggling over the details of the Russian embargo. The vote requires a unanimous decision, but Hungary is against a ban as it would be too destructive to its economy.

The rise in the dollar index harms gold prices. Gold has an inverse correlation to the dollar index and US government bond yields. US inflation is at its highest level, and aggressive monetary policy is already weighed on the price. Therefore, as inflation subsides, gold and silver will once again be good assets to buy, especially since gold miners have a steady increase in profits, which is not reflected in prices yet.

Asian markets closed higher yesterday. Japan's Nikkei 225 (JP225) gained 0.18%, Hong Kong's Hang Seng (HK50) added 0.97%, and Australia's S&P/ASX 200 (AU200) increased by 0.19%. According to New Zealand's Finance Minister, forecasts show signs of slowing inflation. The Monthly Business Survey of Australia (NAB) indicates very good business conditions and confidence. The April survey recorded a significant improvement in leisure and personal services sector conditions after a period of steady decline during the pandemic.

Main market quotes:

S&P 500 (F) (US500) 3,935.18 −65.87 (−1.65%)

Dow Jones (US30) 31,834.11 −326.63 (−1.02%)

DAX (DE40) 13,828.64 +293.90 (+2.17%)

FTSE 100 (UK100) 7,347.66 +104.44 (+1.44%)

USD Index 104.02 +0.10 (+0.10%)

Important events for today:
  • – New Zealand Inflation Expectations (q/q) at 06:00 (GMT+3);
  • – UK GDP (m/m, q/q) at 09:00 (GMT+3);
  • – UK Industrial Production (m/m) at 09:00 (GMT+3);
  • – UK Manufacturing Production (m/m) at 09:00 (GMT+3);
  • – US Initial Jobless Claims (w/w) at 15:30 (GMT+3);
  • – US Producer Price Index (m/m) at 15:30 (GMT+3);
  • – US Natural Gas Storage (w/w) at 17:30 (GMT+3);
  • – US FOMC Member Daly Speaks at 22:00 (GMT+3).

by Justforex, 2022.05.12

We advise you to get acquainted with the daily forecasts for the major currency pairs.

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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