After steep falls on Wall Street, Europe is set for a weaker start amid fears of slower global growth.
· US inflation slowed less than expected sparking fears of a more aggressive Fed and slower growth
· UK Q1 GDP grew by less than expected, and fell in March – GBP/USD falls to a 2022 low
· US PPI is expected to ease slightly but not enough to calm hawkish Fed bets
Wall Street experienced heavy losses yesterday in the US inflation data. US CPI slowed to 8.3% YoY in April; this was a touchdown from 8.5% in March but was still above the 8.1% forecast. Core CPI was also hotter than feared at 6.2% versus the 6.5% forecast.
The data showed that prices were rising across a broad range of categories, raising concerns that it could become entrenched.
The data suggests that peak inflation may well have passed. However, it also shows that inflation is not going to slow down suddenly. Fears are growing that the Federal Reserve will need to act aggressively to bring inflation down, which will come hand in hand with slower growth.
The prospect of a higher interest rate environment saw the Nasdaq suffer the deepest losses, closing 3% lower, while the S&P500 lost 1.6%. Meanwhile, the USD, after an initial fall, rallied back above 104.00 and continues to push higher today.
UK GDP
In Europe, heading towards the open, the DAX is set to open over 2% lower, and the FTSE down 1.6% after data shows that the UK economy grew at a slower pace than expected in Q1 and contracted in March.
Q1 GDP was 0.8% QoQ, down from 1.3% in Q4 of last year, and came in short of the 1% forecast. The growth was thanks to a stronger start to the year as GDP in February stalled at 0%, and March fell by -0.1%. The service sector shrank by 0.2% in March and was the main contributor to March’s drop in GDP.
Since then, inflation has ramped up further, squeezing household incomes and hurting companies’ margins. There is a good chance that Q1 will be a bright spot.
The BoE said that inflation is expected to rise to double digits and warned of a recession in the UK.
GBP/USD
GBPUSD has fallen to a new 2022 low, owing not only to the disappointing GDP data but as Brexit concerns return to haunt traders. Relations between the EU and the UK have deteriorated significantly, with the UK government threatening to scrap the Northern Ireland protocol. The European Union is likely to act quickly in response to such a move, potentially freezing access of UK companies to the EU single market and staying a trade war.
GBP/USD is testing 1.22, with a fall below here opening the door to a deeper decline towards 1.2090 the May ’20 low, and 1.20 the key psychological level. Any recovery would first need to move back over 1.2410.
Looking ahead
US inflation will remain in focus with the release of PPI PPI data. Producer prices could also add to evidence that peak inflation has passed, with the data expected to slip to 10.7% YoY in April, down from 11.2% in March. However, it would take a much larger decline to calm hawkish Fed fears in the market.
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