Bearish Sentiment Roars Across Equities Ahead of Fed Decision
Before the Federal Reserve's interest rate decision on December 12.
The S&P is in bear market territory, prompting a sell-off in Asian stock markets at the start of the trading week. US stocks were hit by the drag on inflation after US consumer price data for May hit a new 40-year high of 8.6 percent.
Bearish Sentiment Roars
Of course, given the Fed's dovish rhetoric, investors and traders conclude that the Federal Reserve is likely to raise interest rate forecasts by at least 0.5 percent, with a 0.75 percent chance of a hike. While monetary tightening will help control inflation, it will likely mean more expensive credit for businesses and households while reducing consumer spending. Higher interest rates against a backdrop of weaker economic conditions can also increase the risk of credit default.
USD rose on safe-haven sentiment while inversely correlated spot gold prices came under pressure. For all the talk of a US recession, the downside to rising interest rates is the possible increase in yields in the bond and savings markets.
The UK today released its latest employment data despite a string of difficult economic conditions. The ILO unemployment rate for the three months ending April was 3.8 percent, compared with the previous reading of 3.7 percent. The high cost of living and rising interest rates could hurt investment in the UK labor market at a time when recovery from the impact of COVID-19 is critical.
Among other trading news, the German ZEW Economic Sentiment Index report is due later today. The index is expected to be at minus 27.5 versus the previous result at minus 34.3. A better-than-expected report could support the EUR, but if actual results are worse than expected, the EUR could be under more pressure.
Finally, today's US Producer Price Index (PPI) report could set the tone for the USD. The survey is expected to increase to 0.8 percent in May, compared to 0.5 percent in April. The report is being watched more closely than usual given inflation conditions in the world's largest economy.
What is US PPI?
The Producer Price Index (PPI) is a leading indicator of wholesale inflation in prices paid to producers and service providers. “Leading” in this sense is by no means important, meaning indicators can tell us which direction inflation is moving. Leading indicators can be interpreted for possible future impacts and lagging indicators interpreted for current impacts.
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This material does not contain, and should not be construed as, investment advice, investment recommendation, offer or solicitation of any transaction in any financial instrument. Please note that such trading analysis is not a reliable indicator of current or future performance as circumstances may change over time. Before making any investment decisions, you should seek advice from an independent financial advisor to ensure you understand the risks.