Market Overview – 19/04/2022

Inflation once more dominated the narrative for markets last week, with CPI data releases from both the US and UK hitting new highs. The latest readings, covering the month of March, showed US consumer price growth surpassing 8%, the highest level since 1981, and the UK equivalent increasing to a 30-year peak of 7%. While both prints topped consensus forecasts, the core figure for the US was lower than expected, providing a short-term rally in Treasuries and equities, though this petered out in due course.

Elevated price pressures continue to dominate central bank communications, though there were no fireworks from the latest ECB monetary policy decision, with the Governing Council continuing to stick to its gradual timetable for removing stimulus. ECB president Christine Lagarde noted additional inflationary pressure from the war in Ukraine and the harder hit imparted on the eurozone economy compared to other regions but failed to be drawn on specifics regarding rate hikes or the end of asset purchases. Markets are pricing in an increase in the ECB’s deposit rate back above zero by year-end and see almost 1.5% by the end of 2023.

With the Bank of England, and in particular the Federal Reserve, ramping up tightening rhetoric and actions of late there was some expectation from investors that the ECB would follow suit and the ECB decision to stay put for now triggered some selling in the euro, with the single currency falling to its lowest level in two years against the US dollar.

The attention on the ECB’s next meeting in June will now be enhanced, with investors looking for clearer signals on when the central bank will stop adding to its €4.9tn portfolio of bonds and issue new forecasts, showing in greater detail the economic fallout from the war in Ukraine. Though their significance in a global macro sense is minimal, the Bank of Canada and Reserve Bank of New Zealand both delivered 50bp hikes last week, providing a possible template for the Fed to follow at its next meeting in early May.

A combination of rising inflation, tighter central bank policy and the economic hit from the Ukraine conflict have caused increased speculation of an imminent recession, though for now economic indicators continue to show some signs of strength. US retail sales increased solidly in March, aided by record-high gasoline prices. The February reading was also revised higher, suggesting consumer spending in the world’s largest economy picked up in the first quarter.

US earnings season has begun, kicked off by a raft of somewhat disappointing first quarter results from banks. JP Morgan, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley all reported double-digit declines in Q1 earnings. Attention now turns to big tech with Netflix and Tesla some of the standout names to report in the coming days.

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