U.S. equities fell on Wednesday after data showed U.S. inflation was higher than economist forecasts, although showed signs that inflation likely peaked earlier this year.
Headline inflation rose +8.3% for the year to April, down from +8.5% in March although higher than the +8.1% forecast by economists, rising +0.3% over the month versus +0.2% expected. Core inflation rose +6.2% over the year, down from +6.5% in March but also higher than the +6% forecast, rising +0.6% over the month compared to forecasts of +0.4%. The slightly higher than forecast figures prompted concerns that inflation may take longer to decline than forecast, adding to worries the Federal Reserve may need to tighten more aggressively, raising the probability of tipping to economy into a recession. Fed Bank of Atlanta President Raphael Bostic didn’t help sentiment, noting he’s open to moving more on rates if inflation persists at elevated levels. Still, traders aren’t pricing in the likelihood of a +0.75% rate increase although have priced +0.5% increases at each of the next two meetings in June, and July and beginning to price in a similar move in September. We’ll get further insight into price pressures tonight with U.S. producer prices data which is expected to rise at a more moderate pace of +0.5% in April compared with +1.4% in March.
The S&P500 retreated -1.65% weighed by technology -3.30% and consumer discretionary -3.57% while energy outperformed +1.34% on higher oil prices. The Dow Jones also declined -1.02%, as did the Nasdaq Composite -3.18% and Russell 2000 -2.48% while the VIX edged -1.30% lower to 32.56. In a sign traders are worried about the outlook for economic growth, the yield curve flattened with the spread between the 2 and 10-year rates weakening -9.5 basis points to 0.291% and the U.S. dollar index edged +0.11% higher to 104.03.
In Europe equities were higher despite the negative sentiment from higher U.S. inflation as investors took comfort from lower COVID-19 infections in China and U.S. President Joe Bide considering eliminating Trump-era tariffs on Beijing. While strict restrictions remain in place, Shanghai said on Wednesday that half of the city had received zero-COVID status and cases in Beijing dropped to the lowest levels since April 26th. The Euro Stoxx 600 rose +1.74%, as did the DAX +2.17%, CAC +2.50% and FTSE100 +1.44% with benchmarks higher across the region. In economic data, German inflation was in line with expectations, rising +7.4% for the year to April from +7.3% previously, and rising +0.8% over the month as forecast from +2.5% previously.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX200 looks set to open lower this morning with ASX200 futures down -33 points or -0.47% to 7,012. The index edged +0.19% higher on Wednesday with gains in materials +0.87% and health care +1.74% offsetting a -1.08% decline in financials. Link Administration Holdings was the largest decliner, falling -15.1% after investors began to doubt whether a proposed takeover by Dye and Durham will good ahead with a shareholder vote locked in for July 13th. In economic data, the Westpac consumer confidence index declined to 90.4 in May from 95.7 previously, while Chinese inflation data was higher than expected. Over the year to April, Chinese prices rose +2.1% from +1.5%, higher than the +1.8% forecast with price increases over the month also higher than forecast. Producer prices, a leading indicator for inflation were also higher than expected at +8% compared to estimates of +7.7% although weaker than the March reading of +8.3%. The Australian dollar was unchanged at 0.6938 on Wednesday while the 10-year yield declined -6 basis points to 3.505%.
Oil prices gained overnight with both WTI and Brent crude rising +5.96% and +4.92% to US$105.71 and US$107.50 respectively. The gains came despite higher than forecast U.S. crude inventories for the week ending 6th of May which unexpectedly rose +8.487m barrels versus estimates for a -1.45m barrel decline. This was in part offset by lower gasoline inventories which declined by -3.607m barrels compared to -1.6m forecast. Iron ore futures in Singapore climbed +4.22% on Wednesday to US$131.78 although are slightly lower this morning, the gains come following three sessions of heavy selling as well as optimism that steel mill demand will return soon as COVID cases ease. Gold gained +0.77% to US$1,852 following U.S. inflation data, as did silver +1.45% to US$21.57 while Bitcoin fell -8.38% as ongoing weakness in the TerraUSD stable coin which has broken its dollar peg weighed on sentiment for cryptocurrencies.
Economic data:
- U.K. GDP (YoY Q1) 16:00
- Chines New Loans (MoM Apr) 18:00
- U.S. Producer Prices (MoM Apr) 22:30
- U.S. Initial Jobless Claims (30th Apr) 22:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
