There’s been an impressive move higher for stocks at the beginning of the week with the FTSE 100 gaining more than 90 points as the market looks to recoup some of its recent losses. After posting its largest weekly loss against the US dollar in over 4 months on Friday evening the pound has also made some gains this morning, albeit relatively small compared to the stock market.
Inflation data on both sides of the Atlantic in the spotlight
The coming week could well prove pivotal for stocks, with any further downside threatening to see another wave of panic grip the markets. The recent declines are widely believed to have been triggered by an announcement on the 1st Friday of the month that showed a notable increase in US wages. The threat of a higher than previously thought inflationary environment going forward has seen bond yields rise and led to some sharp selling in stocks in what appears to be a knee-jerk reaction. The question now is whether the rapid moves were an overreaction or the start of a more sustained decline for equities that have enjoyed a near decade long bull market.
Pick-up in US CPI could spook stocks
The US reading for consumer price index (CPI) will be released on Wednesday and should this metric increase further than forecast then the body of evidence supporting stronger inflationary pressures in the world’s largest economy will increase. The fear amongst some investors is that bond yields have been steadily creeping higher for some time now and in doing so they are showing signs of possibly breaking out of a downtrend that has been in place for the past 3 decades.
Should yields continue to make sustained gains going forward then the recent declines in stocks may be just the beginning of a larger correction that is, by historical terms at least, becoming long overdue.
Bets on BoE rate hikes cool a little
From the UK perspective the most recent CPI figures will be announced tomorrow morning and whilst this data point is unlikely to have the global reach on risk sentiment that its US equivalent is, it could be a key driver for the pound. Hawkish comments from the MPC following last week’s meeting of the central bank had seen the markets assign a probability of another rate hike by May at more than 70% but these expectations have since been pared somewhat and currently are back near 60%.
MPC voting member Gertjan Vlieghe has been speaking this morning on a panel discussing household debt in London and remarks such as 'there is increased evidence that tighter labour markets are beginning to have upwards effect on wages' and that 'if there is less credit headwind to the UK economy then we maybe ready for rate hikes' are certainly erring on the side of being hawkish. The comments are even more noteworthy given that Mr. Vlieghe is deemed one of the most dovish voting members.
CPI expected to drop but remain well above target
However, BoE chief economist Andy Haldane said over the weekend that they are in 'no rush' to hike pointing to the unanimous votes last Thursday in favour of keeping rates unchanged as evidence of this.
The CPI print is expected to show an increase of 2.9% Y/Y compared to 3.0% previously and whilst this remains well above the 2% target for the bank, it may be seen to suggest that inflationary pressure are cooling and therefore the MPC can hold off longer before further tightening monetary policy.