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No sign of easing inflationary pressure

Alternavest Author

13.06.2022

After another inflation surprise in the U.S. on Friday, when the core inflation index for May rose 0.6% month-over-month for the second month in a row, bond yields and the U.S. dollar continued to rise and equity prices fell in overnight trading. Inflation concerns were heightened on Friday by a sharp rise in U.S. household inflation expectations for the next 5-10 years from 3.0% to 3.3%. This is the highest level in 14 years and clearly indicates a risk that inflation expectations are losing ground. We see no signs of easing inflationary pressures in the U.S. and the euro area.

Inhalt

  • French elections

  • Bonds

  • FX

  • What moves the market this week

French elections

The first polls of the first round of the French parliamentary elections show that an absolute majority for Macron's party and its allies is not yet certain. With a projected 275 to 310 seats, they are likely to remain the largest group in parliament, but could still fall short of the 289-majority threshold. Jean-Luc Mélenchon's red-green NUPES alliance has a strong showing, with 180 to 210 seats projected, but could lose some moderate voters in next week's runoff, who are wary of radical ideas such as a massive public investment drive, tax hikes on the wealthy and corporations, and lowering the retirement age to 60. If Macron and his allies lose their absolute majority, it will be more difficult for Macron to implement his ambitious reforms of the pension, education and healthcare systems.

Bonds

The downward movement of the EUR curve triggered by the ECB on Thursday continued on Friday morning and was accelerated by the surprisingly high US consumer price index. Market participants are wondering if the peak of inflation in the euro area is behind us. The 10-year German Bund rose above 1.50% for the first time since 2014, while the gap between Italian and German yields widened by 8 basis points in the 10-year range, but by almost 15 basis points in the 2-year range.

FX

EUR/USD fell below the 1.06 mark on Friday and is now trading near the 1.05 mark after CPI inflation in the U.S. again surprised on the upside. The widening of European government bond spreads also weighed on EUR/USD.

What moves the market this week

All eyes will be on the Fed meeting on Wednesday. High U.S. inflation data was released again on Friday, bringing a possible 75 basis point hike back into focus. We expect a 50 basis point hike with signals for at least another 50 basis point hike in July. Nonetheless, a 75 basis point hike on Wednesday cannot be ruled out. Markets reckon there is a low probability of this happening. 

 

Attention will also be focused on the Bank of England. We expect a 25 basis point hike here. Also, the meetings of the central banks in Switzerland and Japan will be followed with interest. 

The upcoming elections in France and the further widening of the gap between German and Italian yields will also be in focus this week. On the data front, U.S. retail sales (Wednesday), Germany's ZEW (Tuesday), Chinese industrial production and retail sales (Wednesday), and in Scandinavia, Sweden's consumer price index (Tuesday) are all scheduled.

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No sign of easing inflationary pressure

After another inflation surprise in the U.S. on Friday, when the core inflation index for May rose 0.6% month-over-month for the second month in a row, bond yields and the U.S. dollar continued to rise and equity prices fell in overnight trading. Inflation concerns were heightened on Friday by a sharp rise in U.S. household inflation expectations for the next 5-10 years from 3.0% to 3.3%. This is the highest level in 14 years and clearly indicates a risk that inflation expectations are losing ground. We see no signs of easing inflationary pressures in the U.S. and the euro area.

inside-alternavest.article.writtenBy Massimo Di Santo.
Alternavest Partners GmbH Otto-Heilmann-Str. 17 82031 Grünwald

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