Stocks Slide Before US Inflation, ECB Meeting

AFP/APP

London: US and European stocks retreated on Tuesday as investors awaited this week’s US inflation data, the eurozone central bank meeting, and corporate results.

Investors will be poring over US consumer price data to be released Wednesday after the last two inflation reports came in hotter than expected, delaying expectations of interest rate cuts. Then, on Thursday, the European Central Bank meets to discuss interest rate policy for the eurozone. 

The March consumer price index (CPI) data may provide an indication of whether or not the sticky inflation readings at the start of the year were due to seasonal factors and how much possibility there is that the US Federal Reserve could begin to cut rates starting in June.

“The Fed to some extent indicated seasonal factors might have kept inflation sticky in January and February, but that excuse might not fly much longer,” said analysts at Charles Schwab.

The inflation news has the “ability to swing market sentiment, as does the earnings guidance that will be flowing out of the first quarter earnings reporting period,” said Patrick J. O’Hare, an analyst at Briefing.com. 

With US consumer prices picking up in January and February, the jobs market still strong, and the US economy in rude health, traders have regularly rolled back their forecasts for monetary policy easing this year, and some are even contemplating no cuts before 2025.

“At the beginning of this year, markets were pricing in six 25-basis point cuts. Now it’s nearer to two or three,” said Trade Nation’s David Morrison. 

“There have been some FOMC members who feel that the recent stalling of the decline in inflation, together with robust economic data releases, means that it’s far too early to consider cutting rates,” he said, referring to members of the Fed’s monetary policy-setting committee. 

But Schwab analysts said investors may now be okay with that.

“Wall Street’s bullish reaction to last week’s blow-out March jobs report reflects the idea that investors could be getting comfortable with one, two, or even no rate cuts this year as long as there’s no sign of recession and earnings growth continues,” said Schwab analysts in a note to clients.

Despite the news that the US economy created just over 300,000 jobs last month, it hurt the chances of a Fed rate cut in June, but US stocks rose as investors saw it as a good indication for corporate earnings.

The end of the week sees the start of the US earnings season, with JPMorgan, Wells Fargo, and Citigroup up first. Next week, we will see some European luxury groups report, including LVMH, Richemont, Burberry, and Essilor Luxottica.

While the ECB is almost certain to keep interest rates unchanged at Thursday’s meeting, analysts are divided over whether it will wait for the Fed to cut first or if it will be spurred into action by Europe’s sputtering economies. 

In Asia, the Tokyo market was boosted by a weaker yen, which helps exports but is approaching the 152-per-dollar level, which many think could spark an intervention by Japanese authorities.