Investors Fear Fed May Abandon Inflation Target Amid Stubborn Price Increases

Alexander Garcia
13 May, 2024
Mumbai

Benchmark indexes lacked direction in Monday's trading as investors debated the strength of inflationary forces and the Fed's future steps in keeping its promise of lowering inflation to a target rate of 2%. 

The S&P 500 index and the Nasdaq Composite edged higher amid interest rate uncertainty and worries of resurgent inflation. 

Consumer price inflation has slowed from a peak of over 9% to close to 3%, but prices are still rising despite multiple rate hikes. 

Investors are increasingly worried that the Federal Reserve may not be able to bring down inflation without further increasing interest rates, which could slow down the economy and dent labor markets. 

Annual consumer price inflation in April is expected to rise to 3.3%, and core inflation is estimated to advance to 3.5%, according to a survey of economists conducted by Ticker.com. 

The Federal Reserve has clarified that rates are not likely to rise, at least for now, but policymakers have struggled to bring down inflation to its long-term goal of 2%. 

Moreover, wage inflation is still close to 4.5% over the last year, inconsistent with the Federal Reserve's inflation goal. 

Investors are still hoping that the Federal Reserve will lower interest rates, despite several recent updates on economic metrics. 

Retail sales, durable goods orders, new home sales, nonfarm payrolls, and GDP growth suggested that the economy is still expanding at a healthier pace and labor market conditions are still tight but moderating. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index increased 0.1% to 5,223.85, and the Nasdaq Composite fell 0.3% to 16,394.69. 

The yield on 2-year Treasury notes edged lower to 4.86%, 10-year Treasury notes inched lower to 4.48%, and 30-year Treasury bonds edged lower to 4.63%.

WTI crude oil increased $0.54 to $78.80 a barrel, and natural gas prices decreased 1 cent to $2.24 a thermal unit.

Gold increased by $15.12 to $2,344.03 an ounce, and silver rose 17 cents to $28.27. 

The dollar index, which weighs the U.S. dollar against a basket of foreign currencies, edged lower to 105.35.

 

U.S. Stock Movers

GameStop Corp. soared 33% to $23.30 after the 2021 meme stock rally leader with the screen name "Roaring Kitty" posted his first social media post since 2021. 

SquareSpace soared 13% to $43.15 after the e-commerce platform operator agreed to go private in an all-cash deal valued at $6.9 billion. 

The company's board agreed to a $44-a-share cash offer, and the company's chief executive, Anthony Casalena, will continue to lead the company and the board. 

Microsoft, Amazon.com, Accenture, Morgan Stanley, Pfizer, AstraZeneca, and GSK were among several leading companies announcing their plans to invest a total of Є15 billion in France. 

The investment plans were announced at an annual gathering of 180 chief executives during an annual summit of Choose France held in Paris. 

In 2023, several companies at the summit announced plans to invest Є13 billion in France. 

 

European Markets Struggled to Advance Beyond Previous Week's Record Highs 

European markets edged lower in Monday's trading after advancing by 4% in the previous week and reaching new record highs. 

Benchmark indexes in Frankfurt, Paris, and London edged lower in early trading as investors debated the economic data released last week and the interest rate path after the dovish comments from the Bank of England. 

European markets advanced in the previous three consecutive weeks and extended year-to-date gains to between 9% and 10% as investors held out for an interest rate cut in the eurozone and the UK as early as next month. 

Last week, the Federal Statistical Office reported a surge in Germany's trade surplus. 

Germany’s seasonally adjusted goods exports rose 1.2% and imports fell 3%, resulting in a trade balance increase of 29.6% to €22.3 billion.

The calendar and seasonally adjusted surplus stood at €21.4 billion in February 2024 and €17.2 billion in March 2023.

China slipped to the second trading partner position as the country started making several products, including vehicles that it had previously imported from Germany.

In March, combined exports and imports between Germany and the U.S. totaled €21.9 billion, and those between Germany and China added to €22.0 billion. 

However, in the first quarter, combined exports between Germany and the U.S. totaled €63 billion, compared to €60 billion in two-way trade between Germany and China. 

 

Europe Indexes and Yields

The DAX index decreased by 0.2% to 18,739.21; the CAC-40 index fell by 0.2% to 8,205.66; and the FTSE 100 index inched higher by 0.03% to a new intraday record of 8,437.07. 

In the previous week, the DAX rose 4.3%, the CAC advanced 3.2%, and the FTSE 100 index gained 3.4%. 

The yield on 10-year German bonds edged up to 2.50%; French bonds inched higher to 3.00%; the UK gilts edged higher to 4.14%; and Italian bonds inched higher to 3.83%.

The euro edged higher to $1.078; the British pound inched higher to $1.252; and the U.S. dollar edged higher to 90.77 Swiss cents.

Brent crude increased $0.08 to $82.87 a barrel, and the Dutch TTF natural gas fell by €0.30 to €29.56 per MWh.

 

Europe Stock Movers

Diploma PLC increased 5.8% to 4,132.0 pence after the wire and cable supplier reported strong first-half results. 

Revenue in the first half rose 10% to £638.3 million, adjusted operating profit increased 14% to £125.4 million, and basic earnings per share fell to 43.1 pence from 47.3 pence a year ago. 

The company raised its full-year revenue outlook to 16% in constant currency, driven by a 5-percent increase in organic sales and a 10-percent increase through acquisition. 

Annual earnings per share are estimated to rise by 15%, reflecting a strong contribution from recent acquisitions. 

Victrex plc added 1.5% to 1,302.69 pence after the high-performance polymer group reported earnings in the first half declined by a third, but the company held out for earnings improvement in the second half. 

Adesso SE declined 3% to €103.20 after the IT service provider suffered a loss of €3.3 million in the first quarter compared to a profit of €2.02 million in the corresponding period a year ago. 

Ceconomy AG increased 3.8% to €2.31 after the electronics retailer headquartered in Dusseldorf, Germany, said adjusted annual earnings are likely to exceed market expectations. 

Revenue in the fiscal second quarter ending in March increased 6.5% after adjusting for currency and portfolio effects, driven by a 5.1% increase in same-store sales. 

The company now estimates adjusted operating earnings between €290 million and €310 million, surpassing the consensus estimate of €273 million. 

The electronics retailer had previously guided "clear improvement" in adjusted earnings before interest and taxes from the prior year's €243 million in 2023, but the company had not provided a specific range. 

Mission Group PLC fell 5.2% to 23.88 pence after the digital marketing agency rejected a takeover approach from rival Brave Bison. 

Brave Bison increased by 2.0% to 2.58 pence. 

 

Nikkei In Tokyo Edged Lower Ahead of GDP Report

Benchmark indexes in Tokyo eased, and investors turned cautious ahead of the GDP report later in the week. 

Market indexes reversed gains from the previous session as investors looked forward to the release of the first quarter economic growth update later in the week. 

Investors are estimating first-quarter seasonally adjusted GDP growth to decrease by 0.2% from the previous quarter, primarily because of production disruptions in January and February. 

 

Japan Stock Movers 

The Nikkei 225 Stock Average decreased 0.2% to 38,152.90, and the Topix index dropped 0.2% to 2,722.22. 

The yen hovered above 155 against the U.S. dollar as currency traders digested a summary of the Bank of Japan's policy meeting minutes held in April. 

The Bank of Japan's suspected two-day intervention last week lifted the battered yen from a low of 160 to 153, but the persistent weakness in the yen likely to bring the currency closer to 160. 

The wide gap between the U.S. and Japan is likely to keep downward pressure on the yen as the U.S. Federal Reserve is likely to keep the fed funds rate range between 5.25% and 5.5% longer than previously estimated. 

Tech stocks were among the leading decliners in Monday's trading. 

Tokyo Electron and Advantest rose about 0.5%, but Disco Corp., Socionext, and Screen Holdings decreased between 0.5% and 1.2%. 

Mitsui Fudosan declined 6.5% to ¥1,482.0 after the real estate company reported weaker-than-expected quarterly results. 

Kubota Corp. dropped 5.3% to ¥2,353.50 after the farm equipment maker's earnings met investors expectations. 

Revenue in the first quarter declined 0.8% to 775.2 billion yen, net income rose 5.3% to 79.2 billion yen, and diluted earnings per share advanced to 62.06 yen from 58.11 yen a year ago. 

 

China Stocks Advance Overlooking Possible U.S. Tariff Hikes

Benchmark indexes in Shanghai and Hong Kong rebounded on Monday on earnings optimism. 

Market sentiment was cautiously optimistic in early trading after investors shifted their focus to earnings announcements from Alibaba.com and Tencent Holdings. 

Investors are expecting Tencent earnings to advance by 34% and Alibaba earnings to fall by less than 39% in the first quarter. 

Investors also took note of a possible increase in U.S. tariffs for China's electric vehicles, batteries, and solar cells as early as next week. 

Market sentiment was weak in Monday's trading after U.S. President Joe Biden's administration proposed to increase tariffs on electric vehicles and a range of new energy products, including solar panels and batteries. 

The news was first reported by the Wall Street Journal and independently confirmed by Ticker.com from sources in Washington, D.C. 

The tariffs are expected to be announced as early as next week, and tariffs are expected to rise to as much as 100% from the current 27% on most of the new energy products. 

 

China's Consumer Inflation Accelerates In April

On the economic front, China's annual consumer price inflation rose by 0.3% in April, the National Bureau of Statistics reported over the weekend. 

Inflation accelerated from a 0.1% rise in March and rose for the third month in a row, driven largely by the increase in non-food prices. 

Producer price inflation fell annually by 2.5% in April, and the measure of wholesale inflation declined for the 19th month in a row. 

 

Weak Demand Keeps New Bank Loans In Check 

China's aggregate lending in April declined by 200 billion yuan, or about $28 billion, the People's Bank of China reported over the weekend. 

The broad measure of credit and liquidity decreased from 4.87 trillion yuan in March, reflecting seasonal weakness in April.

The new loans issued by Chinese banks dropped to 730 billion yuan, sharply lower than 3.1 trillion yuan in March and the smallest amount since July 2023. 

 

China Stock Movers 

The CSI 300 index increased 0.01% to 3,666.88, and the Hang Seng index advanced 0.5% to 19,049.09. 

New energy product makers were among the leading decliners following the news of a possible tariff hike in the U.S. 

CATL declined 1.8% to 199.88 yuan in Shanghai trading. 

BYD declined 0.1% to HK$223.20, Li Auto decreased 0.3% to HK$102.80, and Xpeng fell 2% to HK$31.30. 

Tencent Holdings rose 1.8% to HK$377.80, and Alibaba Group jumped 4.6% to HK$81.55.