After a solid close on Wall Street, Asian stocks failed to extend the rally, and European bourses are heading for a weaker start on Wednesday.
· Stocks fall as recession fears return ahead of Powell’s testimony
· UK CPI rises to 9.1% a new 40-year high, GBP/USD and the FTSE fall
· USD/JPY rises to a 24-year high after dovish BoJ minutes and ahead of Powell
European stocks closed modestly higher again yesterday, extending gains from Monday. The move higher at the start of this week came following steep losses last week after aggressive central bank action-fueled fears of a recession. But importantly, the move higher also came about without any real change fundamentally. It’s not unusual for stocks to rise after steep losses, but without fundamental backing, the rise would usually be unsustainable.
The S&P 500 closed 2.4% higher. However, futures are falling over 1% today. European stocks are looking weaker, with the FTSE and the DAX set to open 1.1% and 1.5% lower, respectively.
Risk sentiment falters as investors continue to assess the prospect of central banks hiking rates more aggressively to curb red hot inflation and what that could mean for growth.
CPI
UK inflation came in at 9.1% YoY in May, the highest level since March 1982, up from 9% in April and 7.4% in March. Meanwhile, core CPI fell by more than expected to 54.9%, down from 6.2% and missing forecasts of 6%. Higher food and energy prices, in addition to record petrol prices, pushed inflation higher. The BoE expects inflation to continue rising to 11% in the coming months.
Inflation at a 40-year high highlights the worsening cost of living crises and comes as the UK braces itself for a summer of discontent as train drivers strike over pay and workers in other sectors threaten to do the same.
GBP/USD has fallen below 1.2250, and the FTSE is heading towards 7050 following the release.
USD/JPY
USD/JPY rose to a fresh 24-year high of 136.71 overnight after the minutes from the BoJ meeting showed that many board members stressed the need to maintain the central bank’s massive stimulus programme to support the fragile economy. Policymakers saw no reason to tweak Japan’s ultra-low rates and the BoJ’s accommodative stance. The minutes came as attention shifts to Federal Reserve Chair Jerome Powell, who is set to testify before Congress on monetary policy and just a week after the Fed hiked rates by 75 basis points. Central bank divergence couldn’t be more apparent.
All eyes are now on Powell’s two-day testimony, where the markets will be searching for clues as to whether the Fed will hike by 75 basis points again in the July meeting. A hawkish-sounding Powell could boost the USD and drag stocks lower.
Oil
Oil prices are tumbling lower below $104 per barrel on fears over an economic slowdown in the US, the largest consumer of oil, and ahead of Fed Powell’s appearance. Surging oil prices and prices at the pump are not only a problem for the economy but have become a political problem for Biden ahead of the midterm elections later this year. Today, President Biden is expected to call for a temporary suspension of the 18.4 cents per gallon federal tax on oil. API crude oil inventory data is due later today.
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