Inflation worries and interest rate fright saw markets sold off on Thursday ahead of the May CPI data release tonight (our time).
That was after the European Central Bank (ECB) joined the push to tighten, leaving the Bank of Japan as the only major central bank with ultra-easy monetary policy stance.
The ECB said it will stop buying billions of euros of bonds on July 1 and raise interest rates by 0.25% for the first time in more than a decade at the July meeting a few weeks later.
For now, the interest rates on the ECB’s main refinancing operations, marginal lending facility and deposit facility remain unchanged at 0.00%, 0.25% and -0.50%, respectively.
The US Fed, the Reserve Bank of Australia and central banks in NZ, UK and Canada all have started lifting rates and could have their key rates between 1.50% and more than 2%.
Wall Street saw the Dow fall 638.11 points, or 1.94%, to close at 32,272.79. The S&P 500 slumped 2.38% to end at 4,017.82, and Nasdaq shed 2.75% to finish at 11,754.23.
Wall Street’s fall accelerated in the final hour as nerves about the CPI figures took over – the Dow was trading just below 32,700 shortly before 3pm in New York, but the index dropped more than 400 points from there to the close. Ouch!
The ECB statement hit European stocks and the Stoxx 600 index lost 1.3% (it covers the 600 biggest listed companies in the European markets). France’s CAC 40 index fell 1.4%, Germany’s DAX lost 1.7% and London’s FTSE 100 shed 1.9%.
ASX futures trading put the loss for the local market at around 57 points at the re-opening of the market Friday morning.
The ECB said it expects a further hike at its September meeting, but said the size of the increase would depend on the what happens to inflation.
“Beyond September, based on its current assessment, the Governing Council anticipates that a gradual but sustained path of further increases in interest rates will be appropriate,” the ECB said in a statement Thursday.
“In line with the Governing Council’s commitment to its 2% medium-term target, the pace at which the Governing Council adjusts its monetary policy will depend on the incoming data and how it assesses inflation to develop in the medium term.”
The driver for the announcement was the surge in eurozone inflation to an annual rate of 8.1% in May.
That saw the ECB lift its inflation forecasts. Annual inflation is now expected to hit 6.8% in 2022, easing to 3.5% in 2023 and 2.1% in 2024.
This was a substantial increase from its March projections of 5.1% in 2022, 2.1% in 2023 and 1.9% in 2024.
Growth forecasts were revised down significantly to 2.8% in 2022 and 2.1% in 2023, and revised up slightly to 2.1% in 2024. This compares with projections at the ECB’s March meeting of 3.7% in 2022, 2.8% in 2023 and 1.6% in 2024.
This comes as investors are on edge ahead of tonight’s inflation data in the US that could influence the Fed’s rate hike decisions. US headline inflation rose at an annual 8.3% in April with the core reading up 6.2%.
April saw a 0.3% rise month on month after March’s 1.2% surge (right after the Russian invasion of Ukraine in late February.
Yesterday, the First Deputy Managing Director of the International Monetary Fund, Gita Gopinath, said US inflation could remain above the Fed’s 2% target for a long time based on current projections.
“The fact that people have literally been talking about this report for the last several days illustrates how much of an issue inflation has become for the market over the last six months since Fed Chair Powell first started to take a more hawkish approach to inflation,” Bespoke Investment Group said in a note to clients on Thursday.
The US inflation reading will be out around 10.30pm Sydney time Friday.
