Inflation, Growth - Hawkish Central Banks Drive sentiment in Q2
Inflation, GDP growth concerns and hawkish central bank stances in some of the world’s largest economies are set to dominate global investor sentiment as the second quarter begins.
Stocks, commodities, consumer goods and the financial sector are all directly or indirectly affected by inflationary pressures in the commodity markets.
In Q1, inflation pressured commodity prices like crude oil and natural gas upwards, partly because of the conflict in Ukraine and partly because of the residual effects from the COVID-19 recovery. Going forward, higher costs may cut profit margins for publicly-listed companies in the short-to-medium term, potentially impacting on price-to-earnings ratios.
This may apply especially to multi-national goods exporters which now face higher transportation costs and to industrial companies that are heavily dependent on crude oil.
The UK will announce the latest inflation figures for March on an annual basis on April 13. The trading news event on Wednesday may move the GBP depending on whether the results are encouraging or disappointing compared to the previous result of 6.4 percent in February.
Hawkish monetary policies
In related macro-economic developments, central banks in the US, UK and most recently Australia have shifted from dovish to hawkish stances. The US faces the highest inflation levels and is the most aggressive when it comes to taking measures to reduce it to the normal target of 2 percent.
The next Consumer Price Index (CPI) report for the US is out on April 12 and the results may move the USD currency pairs. Market expectations are that US inflation for March will be between six and eight percent on an annual basis. If the results are below or above this expected range, there could be volatility in the USD and spot gold prices.
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The question on the collective investor mind is whether the global economy is growing and recovering from the COVID-19 downturn. The outlook is mixed.
The UK’s recent GDP results for February were disappointing, with growth coming in at 0.1 percent compared to 0.8 percent for January. If the trend continues, it raises the possibility of stagflation, a period of low growth and high inflation, meaning headwinds for household and corporate credit because of higher interest rate guidance from the Bank of England. The BoE may pause on its hawkish course when it considers the lower growth outlook and will be in the difficult position of having to control inflation at a time of economic recovery.
At a global level, the World Bank expects that the conflict in Ukraine will mean GDP contractions of 45 percent in Ukraine and 11.2 percent in Russia, meaning an additional weight on global GDP amid COVID-19 risks. Given that China is Russia’s top trading partner, there’s a risk that the Asian giant may also be affected in the medium-to-long term.
Jobs are the great hope
Growth in the jobs sector is the great hope for monetary policy makers and for investors.
Strong enough growth in jobs could partly offset the negative effects of inflation and maintain investor confidence but any signs of weakness in this area would undermine sentiment.
Job figures in the US and UK are robust and growing stronger in the Eurozone, according to the latest surveys. There is a cloud on the horizon in the sense that the conflict in Europe may drag on investment sentiment and reduce the available resources for creating new jobs.
Market moving trading news
Major trading news events to watch this week include:
- US CPI on April 12
- Germany Harmonised CPI on April 12
- ILO Unemployment Rate on April 12
- Bank of Japan Governor Kuroda speech on April 13
- Reserve Bank of New Zealand (RBNZ) interest rate decision on April 13
- US Industrial Production for March on April 15
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.