Equities lower as rate expectations move higher

Stock markets finished the week lower as US inflation hit a 40 year high, writes Ian Slattery.

Thursday’s Labor Department release showed that prices were up 7.5% in the year to the end of January. Core inflation, which excludes energy and food, rose 6.0% which was the highest rate since 1982. Both readings were above the consensus forecast.

The market now fully expects to see an interest rate hike in the US at the Fed’s mid-March meeting, with some commentators now predicting a 0.5% move. This would be the first half percentage move higher in over 20 years. Comments from Fed Committee member James Bullard did little to calm markets as he forewarned of a number of rate hikes by the middle of the year.

Bonds also saw prices fall on the news. The US 10 year treasury yield is above 2% for the first time since 2019, whilst the 2 year yield moved to 1.64% in its biggest price fall (yields and prices move inversely) since 2009.

Eurozone government yields followed suite with the ten year German Bund yield finishing the week comfortably in positive territory at above 0.20%. Earnings continued to roll in last week, with 360 of the S&P500 having now reported. According to Bloomberg, two thirds of companies have beaten revenue forecasts and three quarters have beaten earnings expectations.

In China, stocks rose on the expectation that monetary conditions would not become overly tight and also on the perception that the regulatory crackdown was subsiding. Oil remained on an upward trajectory as tensions between Russia and Ukraine continue to be elevated.

Finally, COVID restrictions continue to be scaled back throughout the developed world, including in the UK, Denmark, and a number of US states.

Equities

Global stocks were down last week by -0.3% in euro terms and -0.6% in local terms. Year-to-date global markets are down -6.1% in euro terms and -5.9% in local terms. The US market, the largest in the world, was down -1.0%ineuro terms and down -1.4%in local terms.

Fixed Income & FX

The US 10-year yield finished at 1.95%last week. The German equivalent finished at 0.23%. The Irish 10-year bond yield finished at 0.81%to remain in positive territory. The Euro/US Dollar exchange rate finished at 1.13, whilst Euro/GBP finished at 0.84.

Commodities

Oil finished the week at $93 per barrel and is up 24.6% year-to-date in euro terms. Gold finished the week at $1,856 per troy ounce and is down -1.7% year-to-date in euro terms. Copper finished the week at $9,894 per tonne.

The week ahead

Tuesday 15th February

The closely watched US producer price index is published.

Wednesday 16th February

US Retail Sales and the latest Fed meeting minutes are released.

Friday 18th February

UK Retail Sales and US Home Sales go to print.


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