The fact that Federal Reserve (Fed) officials said they intend to continue raising interest rates strengthened the US Dollar while bringing global stocks down yesterday.
After certain Fed officials stated their desire to continue raising rates to combat inflation, global markets started yesterday's session with declines as markets expect a rise in interest rates. The University of Michigan's 1-year inflation estimates, which were issued on Friday and increased from 3.6% to 4.6%, also contributed to the market's current more pessimistic mood.
The corporate earnings season, which started last week, is currently going well, with the major banks exceeding earnings projections. However, for now, this is not enough to give the North American indices bullish momentum, as they are beginning to show signs of exhaustion due to the lack of relevant incentives.
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The market is almost equally divided between those who anticipate a rise of 25 basis points and those who believe that the rates will stay the same, reflecting the continued high level of uncertainty around the Fed’s upcoming decision. Since the Fed prefers to use Personal Consumption Expenditure (PCE) to track the trajectory of inflation, and this inflation statistic will be released next week, it will be significant in this regard. Stock market investors will most likely be pleased with weak data that falls short of forecasts because it will likely raise hopes that rate hikes will soon come to an end.
Even though a large portion of the market anticipates a recession this year and bond yields are well below the federal funds rate, the economy as a whole does not appear to be very weak now, according to available data.
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Manufacturing activity in New York State unexpectedly increased in April for the first time in five months, rising to 10.80 vs. -18.00 anticipated as new orders and shipments decreased.
The US Dollar gained significant strength, especially against the Euro, as market sentiment around interest rate increases picked up.
The EUR/USD pair dropped more than 70 pips yesterday to the area around 1.0900, which is now acting as technical support.
Sources: Bloomberg, Reuters