Inflation continues to skyrocket. The Bank of Canada surprised markets with an ultra-aggressive rate hike

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

The US inflation has significantly beaten analysts' expectations. The US consumer price level reached 9.1% in annual terms, compared to expectations of 8.8%. It is the highest rate since 1981. Last month's gain was 1.3%. The Core Index (which excludes food and energy prices) reached 5.9% y/y, with 5.7% expected. Monthly, the core CPI rose by 0.7%. Such data took a big hit to confidence in the pace of slowing inflation going forward. At the moment, interest rate hikes from the Fed are not giving results, but it is worth realizing that the effect of a rate hike comes with a time lag. Much of the rise in inflation was driven by gasoline prices, which rose 11.2% MoM. Electricity increased by 0.7%, and health care costs also went up by 0.7%. Meanwhile, the White House website released a statement from Joe Biden indicating that the inflation data did not reflect the full impact of the 30-day decline in gas prices, which has seen fuel prices fall by about 40 cents since mid-June. Atlanta Fed President Rafael Bostic said Wednesday that higher-than-expected inflation in June could require policymakers to consider a 100 basis point hike at the next meeting.

Investors are now worried that the Fed may revise its plans to raise 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 expected in its April monetary policy report and is likely to stay around 8% for the next few months. While global factors such as the war in Ukraine and ongoing supply disruptions have been major drivers, pressure on domestic prices due to excess 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 suggests that inflation will begin to decline later this year, dropping to about 3% by the end of next year and returning to the 2% target by the end of 2024. Global energy prices are also projected to decline.

Equity markets in Europe mostly fell yesterday. German DAX (DE30) decreased by 1.16%, French CAC 40 (FR40) fell by 0.73%, Spanish IBEX 35 (ES35) lost 0.87%, and British FTSE 100 (UK100) closed down by 0.74%.

European countries also saw an increase in consumer prices. Over the last month, the inflation rate in Germany rose by 0.1%, in France, the CPI increased by 0.7%, and in Spain, inflation jumped by 1.5% to 10.2% on an annualized basis. The European currency continues to suffer as the region faces an energy crisis caused by sanctions imposed on Russia over its invasion of Ukraine. The European Central Bank faces a dilemma: let the euro fall further, spurring already record-high inflation, or fight back by raising interest rates more quickly, adding to the damage to an economy already suffering heavily from high energy prices.

Oil prices increased for the first time in three days but remained below $100 a barrel. US government data showed the largest weekly oil inventories since the beginning of the year. Given the growth in stocks and at the expense of aggressive interest rate hikes by global banks, analysts predict a decline in oil prices in the coming months.

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

China's exports rose by 17.9% in June from a year earlier, beating analysts' expectations as the economy tries to regain lost momentum due to extensive COVID blockages and supply chain problems, while imports increased by 1.0%, data showed Wednesday.

Australia's unemployment rate fell from 3.8% to 3.5%, with the number of unemployed falling by 54.3 thousand. A strong labor 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 (US30) 30,772.79 −208.54 (−0.67%)

DAX (DE40) 12,756.32 −149.16 (−1.16%)

FTSE 100 (UK100) 7,156.37 −53.49 (−0.74%)

USD Index 107.99 −0.08 (−0.08%)

• – Australia Unemployment Rate (m/m) at 04:30 (GMT+3);
• – Japan Industrial Production (m/m) at 07:30 (GMT+3);
• – Switzerland Producer Price Index (m/m) at 09:30 (GMT+3);
• – US Initial Jobless Claims (w/w) 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 Speaks at 18:00 (GMT+3).

by JustMarkets, 2022.07.14

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.