Inflation and recession fears

European and US stocks fell yesterday and futures suggest a bearish start in Europe.

Inflation and recession fears are taking over, after the European Central Bank (ECB) dramatically raised inflation from 5.1% to 6.8% for this year, and cut growth forecasts, also significantly meaningful, for this year and next.

The ECB has confirmed that it will end bond purchases from July 1 and intends to raise interest rates by 25 basis points in July. Christine Lagarde also said the bank would consider another rate hike in September, and the size of the September hike will depend on inflation.

Yesterday’s ECB decision initially sent EURUSD to May highs around 1.0775. But the single currency returned to gains and the EURUSD fell back below 1.07 before the end of Lagarde’s press conference.

This morning, the EURUSD is trading around 1.0630, meaning that yesterday’s ECB meeting was met with only fleeting optimism. The reduced expectation of a 50 basis point rise in July sent a chill to the euro bulls. As a result, EURUSD strength is likely to remain limited for now.

In the medium term, the ECB is likely to take further hawkish action to pave the way for a stronger euro, towards 1.10 against the US dollar.

At the index level, the ECB’s decision sparked another sell-off in European equities as dismal growth forecasts were a slap in the face for investors. The DAX which was consolidating its gains above the 100-DMA slipped below this level. Euro weakness could limit the selloff, but it’s hard to say if it could reverse the negative trend. With a slowing global economy, the DAX could return to its downtrend that has been building since the beginning of this year, which would imply a drop below 14,000 at its deepest this summer.

Inflation may not look good

US stocks were beaten yesterday, with the S&P500 losing as much as 2.40%, as the US 10-year yield consolidated above the 3.05 mark. The US dollar index once again broke above the 103 level.

Investors are holding their breath in today’s CPI reading. Analysts expect US inflation to stabilize around last month’s 8.3% level, but we could be in for a nasty surprise today as positive pressure on food and energy and the unexpected rise in used car prices in May may keep the index from easing for a while. second consecutive month.

A stronger than expected inflation figure would revive the Federal Reserve (Fed) hawks and eventually push the S&P500 below the 4000 mark before the weekly closing bell. Lower inflation, on the other hand, would rekindle hopes that inflation peaked two months ago and the worst is behind it.

Don’t have too many expectations, though.

For inflation to come down sustainably, we need to see energy prices come down. US crude rose above $123bp this week. Fear of a recession certainly limited upside potential. But the energy minister of the United Arab Emirates said that “if we continue to consume at the rate we have, we are far from the peak, because China is not back yet”, and that “China will come with more consumption. Hopefully they will tap into Russian oil…

But the US LNG chaos, sparked by a fire at a Texas facility, will halt 20% of US oil exports and could drive up LNG prices in the near term.

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