In global markets, eyes turn to inflation data in the US

Global equity markets completed the week with a negative trend, highlighted by a dense agenda of data releases and verbal guidance from central bank officials, with attention now shifting to inflation data to be released worldwide next week.

Despite expectations remaining strong for major central banks worldwide to begin interest rate cuts in the near term, concerns have grown regarding the Federal Reserve’s (Fed) likelihood to initiate such rate cuts later than other central banks, leading to a dampening of risk appetite in equity markets.

Throughout the week, macroeconomic data releases in the US, despite the Fed keeping its policy rate in the range of 5.25-5.50%, the highest level in 23 years, as part of its fight against inflation since July 2023, signaled a strong stance in economic activity. Additionally, hawkish guidance from Fed officials added pressure on equity markets.

Fed Chair Jerome Powell’s remarks on Wednesday emphasized a ‘wait-and-see’ approach, stating, ‘If the economy evolves as we expect, it may be appropriate for most FOMC members to begin reducing the policy rate at some point this year.’ His comments led to a decline in the dollar against other major currencies and upward movements in commodity prices.

Following Powell’s remarks, Minneapolis Fed President Neel Kashkari’s statement on Thursday, suggesting that interest rate cuts may not occur this year unless more progress is made on inflation, contributed to declines in equity markets.

On the macroeconomic data front, non-farm payrolls in the country exceeded expectations in March, indicating a continued tight labor market with 303,000 jobs added and a decrease in the unemployment rate from 3.9% to 3.8%.

Commenting on these data, Richmond Fed President Thomas Barkin noted that the March employment report indicated a ‘quite strong’ labor market.

Fed Board Member Michelle Bowman also forecasted a slower progress in lowering inflation to 2% this year, warning that cutting interest rates too early or too quickly could result in an increase in inflation, potentially necessitating more rate hikes in the future to return inflation to 2%.

Dallas Fed President Lorie Logan emphasized that it was still too early to consider lowering interest rates given upward risks to inflation, highlighting the need to resolve uncertainty about the economic path.

Stressing the need for the Fed to be prepared to respond if inflation fails to decline, Logan mentioned that a flexible approach to monetary policy would allow time to continue evaluating data and making the best choices to achieve price stability and maximum employment.

Following these developments, the probability of a Fed rate cut in June fell to 49% in price markets. A week earlier, this probability was priced at 64%.

Analysts pointed out that next week’s inflation data in the US could cause changes in these pricing dynamics, with the Consumer Price Index (CPI) in March expected to show a monthly increase of 0.3% and an annual increase of 3.4%.

Meanwhile, in light of these developments, bond markets saw selling pressure, with the yield on the US 10-year Treasury rising by approximately 19 basis points to close the week at 4.39%.

The US dollar index, which tested its highest level since November 2023 last week, reaching 105.1, ended the week down 0.2% at 104.3.

Support from Powell for potential interest rate cuts this year, along with expectations that the Fed could start rate cuts in the second half of the year, continued to bolster the price of gold.

Gold prices closed the week at $2,326, recording a weekly gain of 1.5% and achieving the highest weekly close of all time.

Ongoing geopolitical risks and supply concerns supported oil prices upward, with Israeli Prime Minister Benjamin Netanyahu stating during a security cabinet meeting that his country would act against Iran and its proxies, causing a rise in oil prices.

Analysts emphasized that a direct conflict between Iran and Israel would escalate tensions in the Middle East, potentially pushing oil prices even higher.

Thus, Brent crude oil’s barrel price, continuing its upward trend for the fourth consecutive week, closed the week at $90.6, recording a 4.4% increase and achieving the highest weekly close since October 2023.

Additionally, the Food and Agriculture Organization (FAO) reported that the Global Food Price Index rose by 1.1% to 118.3 points in March, driven by increases in vegetable oils, meat, and dairy prices.

Negative trend dominates on the New York Stock Exchange Last week, macroeconomic data releases in the US pointing to strong economic activity, along with indications that the Fed’s interest rate cut might be postponed from June to July, led to a bearish trend on the New York Stock Exchange.

According to data released last week in the US, the JOLTS job openings rose by 8,000 in February to 8.756 million, while ADP private sector employment increased by 184,000 in March, exceeding market expectations. It marked the largest increase in hiring since July.

While initial jobless claims in the US increased more than expected to 221,000 last week, reaching the highest level in two months.

Average hourly earnings, closely monitored by the Fed, increased by 0.3% to $34.69, in line with expectations, while consumer credit in the US increased by $14.1 billion in February, below expectations.

The US trade deficit rose by 1.9% on a monthly basis in February to $68.9 billion, surpassing expectations for the deficit to reach $66.9 billion.

The Institute for Supply Management (ISM) non-manufacturing Purchasing Managers’ Index (PMI) fell by 1.2 points to 51.4 in March, below market expectations, while the PMI data released by S&P Global also declined by 0.6 points to 51.7 during the same period.

As a result of these developments, the Nasdaq index on the New York Stock Exchange fell by 0.80%, the S&P 500 index by 0.95%, and the Dow Jones index by 2.27% during the week.

In the week starting on April 8th, alongside inflation and budget balance data in the US on Wednesday, the minutes of the Fed’s recent meeting on Thursday, Producer Price Index (PPI) and weekly jobless claims on Thursday, and the University of Michigan consumer confidence index on Friday will be closely watched.

Negative trend dominates in European equity markets as well Negative sentiment prevailed in European stock markets last week, with investors focusing on the European Central Bank’s (ECB) interest rate decision and comments from ECB President Christine Lagarde.

Analysts expressed confidence that the ECB would keep interest rates unchanged at this week’s meeting, while expectations remained strong for the bank to start interest rate cuts in June.

Analysts noted that preliminary inflation data released across the region indicated a slowdown in inflation, and ECB members were believed to be making steady progress towards the 2% inflation target.

According to preliminary inflation data released in the Eurozone, the CPI increased by 2.4% year-on-year in March, below expectations, while it also rose by 0.8% on a monthly basis.

In Germany, inflation slowed to 2.2% year-on-year in March, reaching its lowest level since April 2021, according to preliminary data.

Last week, minutes from the ECB’s recent meeting indicated that members expected inflation to continue its downward trend in the coming months. The minutes also noted increasing confidence in progress towards the 2% inflation target and consideration of interest rate cuts.

Meanwhile, international credit rating agency Moody’s confirmed the credit rating of the European Union (EU) as “Aaa” while maintaining the credit rating outlook as “stable”.

With these developments, last week the DAX index in Germany fell by 1.72%, the FTSE 100 index in the UK by 0.52%, the CAC 40 index in France by 1.76%, and the MIB 30 index in Italy by 2.13%.

Next week, industrial production in Germany will be followed on Monday, ECB interest rate decision and Lagarde’s statements on Thursday, and final inflation data in Germany on Friday.

Mixed trends observed in Asian stock markets Last week, mixed trends prevailed in Asian equity markets, with mixed statements coming from Japan’s economic management.

At the beginning of the week, Japanese Finance Minister Shunichi Suzuki stated that the Bank of Japan (BoJ) would ‘probably’ continue its expansionary monetary policy and also indicated that the bank was ready to act against excessive currency volatility.

Suzuki warned that rising long-term interest rates could increase borrowing costs, posing a risk to Japan’s fiscal situation.

On the last trading day of the week, BoJ Governor Kazuo Ueda signaled the possibility of interest rate hikes in the second half of 2024.

Ueda mentioned that the decrease in the impact of past increases in import costs on Japan’s inflation and the end of government incentives for energy could affect inflation in the future.

Moreover, Ueda stated that if exchange rate movements were to have a difficult-to-ignore impact on the country’s inflation and wages, the central bank could ‘respond with monetary policy’.

As a result of these developments, the dollar/yen pair closed the week with a 0.2% increase at 151.59.

Additionally, according to data released across the region, the manufacturing PMI in China rose to 51 in March, indicating an increase in economic activity in the country.

While the Caixin services PMI in China rose to 52.7 in March, recording 15 consecutive months of expansion, in Japan, the services PMI in March fell below expectations to 54.1.

Furthermore, following earthquakes in Taiwan last week, the world’s largest chip manufacturer, Taiwan Semiconductor Manufacturing Co. (TSMC), announced the resumption of operations at some of its factories after temporarily suspending production.

As a result of these developments, on a weekly basis, the Shanghai Composite index in China rose by 0.92% and the Hang Seng index in Hong Kong by 1.10%, while the Nikkei 225 index in Japan fell by 3.41% and the Kospi index in South Korea fell by 1.18%.

Next week, producer price index in Japan on Wednesday, producer price index in China on Thursday, and capacity utilization rate in Japan along with trade data in China on Friday will be closely watched.

Record closing from Borsa Istanbul In the domestic market, the BIST 100 index on the Borsa Istanbul completed the week with a record level, recording the highest weekly close of all time with a 5.21% gain, closing at 9,618.83 points.

According to data released in the country last week, the CPI increased by 3.16% on a monthly basis in March, and the Domestic Producer Price Index (D-PPI) increased by 3.29%. The annual inflation rates stood at 68.5% for consumer prices and 51.47% for domestic producer prices.

Minister of Treasury and Finance Mehmet Şimşek stated, ‘Monthly inflation decreased as expected in March. We will do whatever it takes until we reach our top priority, which is price stability.’

While the Central Bank of the Republic of Turkey (CBRT) continued its simplification steps, it decided to reduce the security ratio applied to securities subject to securities obligations from 4% to 1% and to end the practice related to securities obligations based on credit growth.

The CBRT also announced that as of March 31, 2024, domestic residents could convert their existing foreign currency deposit accounts and foreign currency participation fund accounts into Turkish lira at banks, and raised the maximum monthly contractual interest rate applicable to credit card transactions (excluding cash withdrawal or usage transactions) from 3.66% to 4.25%.

Following these developments, the dollar/TL closed the week at 32.0318, 1.1% below the previous closing.

Analysts noted that industrial production data will be followed on Monday next week, and reminded that Borsa Istanbul will be open until 12:40 pm on Tuesday, April 9, before the Ramadan Feast holiday.”

source: prepared by Melisa Beğiç

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