Inflation continues to rise. Bank of Canada surprised markets with aggressive rate hike: InvestMacro

by just forex

Stock indices reacted to the news of US inflation data with a sharp drop. At the close of the exchange, the Dow Jones (US30) was down 0.67%, while the S&P 500 (US500) was down 0.45%. The Nasdaq Technology Index (US100) lost 0.15% yesterday. At the end of the day, all three indicators were down. The yield curve inversion gap between 2-year and 10-year bonds reached 25 points yesterday, which is also negative for the stock market and the economy.

Inflation in the US significantly exceeded analyst expectations. The US consumer price level came in at 9.1% on an annual basis, compared to expectations of 8.8%. It is the highest since 1981. Last month’s gain was 1.3%. The core index (which does not include food and energy prices) came in at 5.9% year over year, with a forecast of 5.7%. Monthly, core CPI rose 0.7%. This data dealt a major blow to confidence in the pace of inflation slowing in the future. For now, the Fed’s rate hikes are not producing results, but it’s worth recognizing that the impact of a rate hike comes with a time delay. Much of the rise in inflation was driven by gasoline prices, which were up 11.2% from the previous month. Electricity increased 0.7%, and healthcare costs increased 0.7%. Meanwhile, the White House website released a statement from Joe Biden noting that the inflation data did not reflect the full impact of the 30-day drop in gas prices, which has seen fuel prices fall nearly 40 cents since mid-June. Atlanta Federal Reserve Chairman Rafael Bostic said on Wednesday that higher-than-expected inflation in June may require policymakers to consider a 100 basis point raise at the next meeting.

Investors are now concerned that the Federal Reserve may revise its plans to raise interest rates by 100 basis points at once, as the Bank of Canada did yesterday, which also surprised traders. The Bank of Canada said in a statement that inflation in Canada remains more resilient than the bank forecast in its April monetary policy report and is likely to remain at around 8% for the next few months. While global factors such as the war in Ukraine and ongoing supply disruptions were major factors, pressure on domestic prices due to increased demand is becoming more prominent. More than half of the components that make up the CPI have increased by more than 5%. With this expansion in price pressures, the bank’s core inflation indicators have increased. The bank expects the Canadian economy to grow 3.5% in 2022, 1.75% in 2023, and 2.5% in 2024. Economic activity is slowing as global growth slows and monetary policy tightens. The July forecast indicates that inflation will start to decline later this year, dropping to around 3% by the end of next year and returning to the 2% target by the end of 2024. Global energy prices are also expected to fall.

Most of the stock markets in Europe fell yesterday. Germany’s DAX (DE30) shed 1.16%, France’s CAC 40 (FR40) shed 0.73%, Spain’s IBEX 35 (ES35) lost 0.87%, and Britain’s FTSE 100 (UK100) closed 0.74% lower.

European countries have also seen an increase in consumer prices. Over the past month, the inflation rate in Germany rose by 0.1%, in France, the CPI rose by 0.7%, and in Spain, inflation jumped by 1.5% to 10.2% on an annual basis. The European currency continues to suffer as the region faces an energy crisis stemming from the sanctions imposed on Russia over its invasion of Ukraine. The European Central Bank faces a dilemma: allow the euro to fall further, stimulate already high inflation, or fight back by raising interest rates more quickly, adding to the damage to an economy already suffering badly from high energy prices.

Oil prices rose for the first time in three days but remained below $100 a barrel. US government data showed the largest weekly oil stocks since the beginning of the year. Given the growth of stocks and at the expense of sharp increases in interest rates by global banks, analysts expect a decline in oil prices in the coming months.

Asian markets were mostly higher yesterday. Japan’s Nikkei 225 (JP225) is up 0.54%, Hong Kong’s Hang Seng (HK50) is down 0.22% and Australia’s S&P/ASX 200 (AU200) is up 0.23% on the day.

Data on Wednesday showed that China’s exports rose 17.9% in June from a year earlier, topping analysts’ expectations as the economy tries to regain momentum lost due to the widespread disruptions of the coronavirus and supply chain problems, while imports increased 1.0%.

The unemployment rate in Australia decreased from 3.8% to 3.5%, with the number of unemployed people falling by 54.3 thousand. A strong job market with high inflation gives the central bank room to raise interest rates more aggressively.

S&P 500 (F) (US500) 3,801.78 17.02 (−0.45%)

Dow Jones (US 30) 30,772.79 208.54 (−0.67%)

DAX (DE40) 12,756.32 149.16 (−1.16%)

FTSE 100 (UK100) 7156.37 −53.49 (−0.74%)

US dollar index 107.99 −0.08 (−0.08%)

Important events for today:

  • – Australian unemployment rate (month / month) at 04:30 (GMT +3);
  • – Japanese Industrial Production (m / m) at 07:30 (GMT +3);
  • – Producer price index in Switzerland (m / m) at 09:30 (GMT + 3);
  • – US Initial Jobless Claims (w/s) 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 Waller speaking at 18:00 (GMT +3).

by just forex

This article reflects a personal opinion and should not be construed as investment advice and/or a continuing offer and/or solicitation to carry out financial transactions and/or guarantee and/or anticipation of future events.

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