Strong US economic data drives interest rate futures, but CPI slowdown causes uncertainty. Delayed inflation may lead Fed to keep high rates for long, causing a treasury yield spike that could negatively impact investors.
Yesterday, in observance of Washington's birthday, the United States had a national holiday, leading to minimal market activity. Additionally, there were no significant economic figures released.
During the session, both American and European stock indices closed almost unchanged from the previous day. The dollar remained at similar levels to Friday's, but with slight downward pressure due to the market interest rates, or yields of treasury bonds, remaining at the low levels reached at the end of the previous week.
However, there is growing sentiment in the market that the Federal Reserve will be compelled to raise interest rates above expectations, possibly up to 5.25%. As a result, interest rate futures are beginning to price in three increases of 25 basis points, instead of the previous estimate of two.
The recent changes in interest rate futures are being driven by recently released economic data showing strength in the US economy, such as robust retail sales and labor market figures. In addition, the latest CPI data has created uncertainty in the market due to a slowdown in the rate of decline in inflation.
If inflation takes longer to reach the 2% target, the Federal Reserve may decide to keep interest rates high and unchanged for an extended period of time, leading to a spike in treasury yields that would likely be poorly received by investors.
As a result, all economic data published from this point forward, whether related to economic growth, inflation, or labor, will be closely followed by investors and could have an impact on the price of financial assets.
Today, the manufacturing Purchasing Managers' Index (PMI) for Europe and the United States will be released. In the case of Europe, the impact of this figure could be less significant because the market has already factored in the European Central Bank's plan to continue raising interest rates up to 3.5%, regardless of the economy's performance.
As for the United States, a slight increase is anticipated compared to the previous month, but it is still projected to be below the growth threshold, which stands at 50 in this index. Nevertheless, if the figure exceeds expectations, it could increase the market's fears of high interest rates from the Federal Reserve (Fed), strengthen the dollar, and exert pressure on stock indices.
WTI crude oil rose by around 1% yesterday on the expectation of increased demand from China and escalating tensions in the Ukrainian war. However, it is still technically within a wide price range between 81.70 and 72.70.
Related: Oil analysis and price predictions
Sources: Bloomberg, Reuters