US and European markets have struggled to have a clear theme this week. Last week, we saw some improvement in the sentiment but this week’s US CPI reading along with the earnings season sentiment has changed from optimism to pessimism. Traders are now once again worried about the forecast which is being delivered by the US companies.
Today we are going to hear more earnings from the US banks such as Citigroup and next week it will be the investment giant Goldman Sachs announcing its results. If we have learned anything from the banks’ earnings this week it is that the US banks have failed to bank on higher volatility.
There has been very little evidence of banks beating the forecast on any metric. It was already widely expected that the mergers and acquisition numbers are going to be on the low side as free money has left the town—the hawkish monetary policy adopted by central banks has slowed the M&A process. But investors were hoping that banks will be able to deliver better trading numbers which in JP Morgan’s case wasn’t the scenario.
Today, investors will be looking at the US Retail Sales and Core Retail Sales numbers. Both numbers will be released at 12:30 PM GMT and the forecast for the Retail Sales m/m is 0.9% while the previous reading was at -0.3%. As for the Core Retail Sales m/m, the forecast is for 0.7% and the previous reading was 0.5%.
The Big Theme
Everything is now on the table for the Fed after the shockingly high US inflation report, which was well above forecasts. This includes an interest rate increase of 100 basis points. The US inflation rate came in at 9.1 percent this week, which was the highest level in more than 41 years. Although traders have been anticipating a peak in US inflation statistics for some time, it appears that there is still some suffering to come.
The path of least resistance for the US CPI number is more likely to be a consolidation with a slight slant to the downside, even though many people think that this week’s US inflation figure may have represented an inflation reading top. This indicates that it will likely take a long time and a lot of effort for inflation readings to drop below the Fed’s current target if they happen at all.
Having said that, not all predictions for inflation readings are gloomy because the US stock market did recover some losses this week. The fact that oil prices have started to decline from their peak is what is causing the present optimism. For instance, both Crude and Brent oils are currently trading below the $100 level, which should aid inflation readings since higher oil prices were one of the primary causes behind rising inflation.
From this point forward, separating market noise from market reality will be crucial for traders and investors. There is no doubt that several Fed members will start making extremely hawkish comments going forward. For instance, Chief Raphael Bostic of Atlanta and Loretta Mester of Cleveland have already begun to assert that nothing ought to be disregarded.
In terms of the Fed’s monetary policy, we believe that an interest rate of 75 basis points in the upcoming several sessions is the most likely scenario given the current situation. In our opinion, it is doubtful that the Fed would raise interest rates by 100 basis points during any of the sessions since doing so would be painful.
Forex
Thanks to the strength of the dollar index, which surged on the strength of the US CPI figure, the EUR/USD officially broke parity this week. There is no question that the Euro is significantly oversold on a daily and time-frame basis.
In terms of the long-term prognosis, the difference between the monetary policies of the EU and the Fed is very vast. To put it another way, the ECB is more likely to front-load its interest rate, and there are far more opportunities for it to raise it by 100 basis points or more to catch up.
The projection for the Eurozone for this year has already been reduced by the EC. The latest forecast for the Eurozone’s GDP is 2.6 percent, and it attributes the slowdown to increased inflation. The European Commission predicts that the Eurozone’s GDP would rise by just 1.4% in 2023, a significant decrease from the prior prediction of 2.3 percent.
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Photo by Austin Distel on Unsplash