Mid-week review and week ahead:
The US Dollar continues to rise after a number of Federal Reserve speakers spoke overnight in favor of a 50bps hike for now but didn’t rule out a 75 bps increase if inflation remains persistent in the 2HCY22. It gained further impetus as officials of the Federal Open Market Committee debated the possibility of a 75 basis point rate hike at the central bank’s June 14-15 meeting, after endorsing 50-bps and 25-bps increases at the May and March meetings respectively. If the Fed signs off next on a 75-bps hike, it will be the central bank’s biggest upward adjustment in rates since 1994. The US central bank is expected to increase rates by a further 200 basis points this year, and while most of this is priced into the greenback, the US dollar will likely appreciate further. The recent financial market clash between bulls and bears is likely to continue and possibly escalate as spiking inflation and rising interest rates continue to dominate investor focus.
Today’s US inflation data, expected to move lower to 8.1% in April from 8.5% in March. While any downturn in price pressures will be welcome, it should be noted that the March reading was the highest level of headline inflation seen in the US in over 40 years. Still, the primary market drivers will remain the level of hawkishness the Fed applies to upcoming hikes along with whether we’ve reached peak inflation, something that could become apparent via this week’s CPI and PPI releases. Economists expect the PPI’s reading to come in at 10.7% versus the 11.2% print seen in March. Some economists have already made the call regarding peaking inflation, with expectations for April’s YoY CPI’s forecast to be slightly below March’s 8.5%. Investors could then look to Treasury yields to gauge the market’s interpretation of the data.
Ahead, the highlight of central bank speakers will be ECB President Christine Lagarde. Later on, the market will be paying attention to Atlanta Fed President Raphael Bostic, known for his hawkish views. Then, after German inflation data, the market focus will be on the US CPI number.