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"THE SHADOW OF 2011" (1107 GMT)
As some analysts put it, the hawks took control of the situation as the European Central Bank yesterday signalled more rate hikes despite worries about a weakening economy.
According to Unicredit, the ECB policy “creates measurable downside risks to growth going forward.”
“We are concerned that the ECB might underestimate the impact on the activity of tightening financial conditions already in train and the pipeline,” Unicredit analysts say.
“A weaker EUR in reaction to yesterday’s announcements is exactly the opposite of what the ECB had hoped to achieve and seems to indicate that markets smell trouble ahead,” they add.
“The ECB is tightening policy for reasons that, in its acknowledgement, are principally a function of non-demand factors, into a slower growth environment,” says Andrew Mulliner, head of global strategies at Janus Henderson.
“The shadow of 2011 may have dimmed, but it has not disappeared,” he adds.
(Stefano Rebaudo)
IN BETWEEN NARRATIVES (1041 GMT)
We're about two hours ahead of the release of the much anticipated U.S. CPI and it feels like markets are at crossroads.
Indeed, much behind the rebound enjoyed since the lows hit in May were hopes that the worst was probably over when it came to inflation and growth.
"Equities were getting hopeful of an imminent peak in inflation that would bring a more balanced ECB communication", Barclays' European equity strategy team argues in a note.
"China reopening hopes, along with resilient PMI in US/Europe, may also have played a role in lifting growth expectations", they added cautioning that the last few days showed the state of play is more blurry than that, particularly after the ECB clearly signalled its hiking intentions.
"Hawkish ECB (and RBA) reminded us that inflation comes above growth/markets considerations", the analyst stress, adding that the "the rally in oil continues unabated and China reopening seems elusive".
With absolutely no guarantees of a soft landing, "choppy markets" are to be expected as long as uncertainty remains on the core inflation issue.
TAMING THE INFLATION DEMON? BOND CURVES SUGGEST ECB CATCHING UP (1001 GMT)
Investors are probably still wondering if the European Central Bank is ahead or behind the curve after yesterday’s hawkish twist, which drove euro zone yields to fresh highs.
The question is whether the expected tightening path – starting with a 25 bps rate hike in July and a potential 50 bps move in September – is enough to tame surging inflation, or we should expect a new hawkish shift soon.
While nobody has a straight answer, as economic conditions are prone to change also significantly due to potential war developments, markets provide some signals.
“It should be seen as an encouraging sign that the curve bear flattened as it suggests that the market starts to think that the ECB is finally getting on top of the inflation problem,” ING analysts said in a research note.
Longer-dated yields falling below or close to shorter ones indicate a lack of faith in future growth, usually meaning that central banks have tightened their monetary policy too much.
“Ending net purchases makes room to embark on a proper rate hike cycle at the next meeting,” they add.
(Stefano Rebaudo)
MAKE OR BREAK U.S. INFLATION (0954 GMT)
With so much nervousness across markets this morning, it seems pretty reasonable to assume that the fate of this session will be determined by the release of U.S. inflation data at 1230 GMT.
The STOXX 600 currently losing 1.3% and set for a weekly loss of 2.5% but that could change quite drastically should the data deliver a big surprise.
Currently, here are how things stands with the Reuters poll at 8.3% for May:
Susannah Streeter at Hargreaves Lansdown sums it up in a morning note:
"Signs that prices had spiralled even higher last month, are likely to set off a fresh round of selling, but a lower than expected reading could prompt a wave of buying which would top off a volatile week for stocks".
Looking at what this would mean for U.S. stock markets, Ipek Ozkardeskaya at Swissquote reckons higher than expected inflation could "eventually push the S&P500 below the 4000 mark before the weekly closing bell".
What about a positive surprise?
"A print at 8.20% or lower probably sees a buy everything, sell US Dollars rally, as Fed hiking expectations are pared ahead of next week’s FOMC", Oanda analyst Jeffrey Halley wrote earlier.
Looking specifically at the dollar, Commerzbank, Ulrich Leuchtmann cautioned that lower than expected inflation won't necessarily weigh on the dollar.
"(Weak inflation data) would dampen the prospect of more rapid rate hikes that would constitute a positive signal for the dollar, as this would marginally reduce the likelihood of the Fed having to bring about a 'hard landing' of the US economy in an effort to stop inflation", he argued.
"As a result, there is a chance that USD exchange rates might react to surprises in an unusual manner", he concluded.
(Julien Ponthus)
REDDER THAN EXPECTED (0728 GMT)
European equities were expected to open in the red but the shade is a tad darker than what futures had suggested earlier.
The pan-European STOXX 600 is losing 1.3% about fifteen minute after cash trading began with markets bracing for the release of U.S. inflation data later on this session.
Wall Street futures, which were unambiguously positive after yesterday's sell-off, are now flat to lower.
Adding to the pressure, euro zone bond yields show no signs of retreating after rising on Thursday after the ECB laid out plans to raise rates in July.
In terms of individual stocks, Credit Suisse stands out losing over 4% after State Street denied a takeover rumour.
Among the few shares having a good day is Just Eat Takeaway, which is up 3.7% after a media report Apollo could be among the possible suitors for Grubhub.
You can see below how futures for the S&P 500 have fallen in the last minutes:
(Julien Ponthus)
THE RACE TO THE EXIT (0633 GMT)
A big week in markets is about to get bigger.
A day after the European Central Bank took markets by surprise by signalling not just rates lift off in July but possibly a bigger move in September to contain high inflation, May U.S. inflation data could show another hot reading.
Headline inflation is expected to match April's 8.3% reading, meaning pressure to go big and fast on rate hikes.
Economists expect no respite from an aggressive Fed -- analysts expect two 50 basis point rate hikes in June and July in the latest Reuters poll.
And pressure is rising on other central banks to follow suit, with the Bank of England and Sweden's Riksbank expected to hike rates again next week. The Swiss National Bank also meets next week.
While the rush to exit easy monetary policy making has accelerated from Australia to Canada, the bad news for markets is that soaring inflation shows no signs of retreating.
The cost of filling an average family car with petrol in Britain hit 100 pounds ($125.06) for the first time this week and the pressure is only expected to intensify on household budgets as the peak summer season gets underway.
Exacerbating the price pressure is tightening supply due to reduced imports from Russia. Goldman Sachs predicts Brent crude oil prices to average $140 between July and September, a 16% increase from current levels.
China's COVID situation is becoming a worry again for investors after Shanghai put more districts in lockdown to conduct testing after community infections rebounded and Beijing tightened restrictions in another district.
Markets are reflecting the gloomy outlook with world stocks set for its biggest weekly drop in more than a month, while European and U.S. stock futures are in the red on the last trading day of a volatile week.
The euro is struggling to stay above the $1.06 levels while bond yields are a touch higher.
Key developments that should provide more direction to markets on Friday:
- U.S. May inflation: Poll: 8.3%, previous 8.3%
- State Street denies interest in buying Credit Suisse
- Defying global surge, China's factory inflation hits 14-month low
- Beijing gives initial nod to revive Ant IPO after crackdown cools-sources
- Central Bank of Russia meets
- University of Michigan inflation survey
BRACING FOR U.S. INFLATION DATA (0557 GMT)
Euro STOXX 50, DAX and FTSE futures are losing about 0.8% at the moment, which isn't much of a surprise after yesterday's sell-off on Wall Street.
Trading today pretty much continues to be focused on the U.S. inflation data scheduled to be released in early afternoon European time.
Any big surprise upwards is likely to weigh further on stocks after U.S. and euro zone bond yields jumped yesterday.
On that note, a lot of attention will be dedicated to comments by ECB policy makers after the central bank signalled a string of interest rate hikes starting in July to tame record-high inflation.
France's Villeroy de Galhau just told BFM Business radio that the ECB will gradually hike until it reaches the so-called neutral rate, which he sees somewhere between 1% and 2%.
(Julien Ponthus)
