Global Stocks Rebound, U.S. Inflation Expected to Moderate
Last Week Review
Global equities increased 2.7% last week led by gains in the U.S. Investors likely are focused on the Federal Reserve meeting in September, Europe’s high natural gas prices and China’s continued COVID-19 lockdowns. The two-year Treasury yield hit new 2022 highs on Friday, finishing the week up 0.17% to 3.56%. The 10-year yield rose 0.12% to 3.31%. Credit spreads fell last week with investment grade spreads down 0.04% to 1.31% and high yield spreads down 0.45% to 4.50%.
ECB Raises Rate 0.75%
The European Central Bank hiked its policy rate from zero to 0.75% last Thursday. The central bank communicated that it is likely to continue its tightening policy in future meetings. European area interest rates moved higher by 0.15% to 0.25% for the day, while equities saw modest gains and the euro was roughly flat versus the U.S. dollar. Rate hikes by the bank may end up proving to be front-loaded as rising growth headwinds could prevent the central bank from continuing to raise rates in 2023.
Expectations Solidify for 0.75% Fed Rate Hike
Meanwhile, investor expectations for a 0.75% Federal Reserve rate hike pushed higher last week, increasing to 91% from 56% over the week. In a public event last Thursday, Fed Chair Jerome Powell emphasized the central bank’s strong commitment to bringing inflation lower, while also opting not to push back against increasing market expectations for a 0.75% September Fed move.
Policymakers Address Europe’s Energy Crisis
Europe continues to face high natural gas prices, with current prices more than 10 times above 2019’s average levels. European leaders debated measures to buffer against high electricity prices, while new U.K. Prime Minister Liz Truss introduced a £150 billion economic support package that would cap energy bills for households for two years in addition to six months of help for businesses. Brent crude oil prices dropped below $90 last week, even after OPEC plus announced a 100,000 barrel-per-day production cut early last week.
Economic Data Mixed Across Continents
Last week’s economic data varied across the U.S. and China. Data in the U.S. was positive modestly, including lower initial jobless claims compared to recent weeks. China’s data was weaker, including trade data that fell short of expectations and prior levels as economic headwinds from COVID-19 lockdowns continue to be a key concern.
This Week’s Preview
Ukraine’s War and Europe’s Energy Crisis Remain Top News
Ukraine’s war is centered on the country’s offensive in the eastern and southern parts of the country. Russia’s relationship with Europe is likely to experience additional developments given tensions over the Nord Stream 1 pipeline shutdown. Russia’s President Vladimir Putin and China’s President Xi Jinping are meeting on Thursday and could shed some light. Europe policymakers will keep working to ease the burden of high energy prices for both businesses and consumers.
U.S. Inflation May Moderate
Inflation, based on Consumer Price Index data scheduled for Tuesday, is expected to decline while core inflation, which excludes more volatile energy and food prices, is expected to modestly increase. Consensus expectations call for 8.0% year-over-year inflation in August, versus 8.5% in July. However, surveys show that core inflation may increase to 6.1% in August from 5.9% in July. This will be the last major inflation data released prior to the Fed’s September 20–21 meeting.
Europe, China Release Growth and Inflation Data
Several economic indicators will be released this week for Europe (August inflation, business sentiment, industrial production) and China (retail sales, industrial production). The Bank of England meeting originally scheduled for this week has been delayed a week to observe the royal mourning period for the death of Queen Elizabeth II.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of September 11, 2022.
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