Data confirmed yesterday that inflation in the Eurozone advanced to 7.4%, a tick lower than the 7.5% expected by analysts. Yet the German producer prices jumped more than 30% year-on-year in March, the fastest rise in 73 years. And the main responsible for soaring producer prices was the soaring energy costs, which rose 84% and natural gas prices, that skyrocketed 145% since last year. And the situation may get worse before it gets better as tensions in Ukraine escalate with Russia congratulating itself for the fall of Mariupol, while Ukrainian leaders say the city has not completely fallen. On the other hand, the Russian oil production is down by 10% from the pre-war levels, and further decline is expected. Meanwhile, Europeans are not ready to walk away from the Russian oil and gas, but the warning against making ruble payments, and the rising nuclear threat could call for further sanctions.
For now, the barrel of crude consolidates a touch above the $100pb mark. The rising hawkish expectations for the Federal Reserve (Fed) and the European Central Bank (ECB), combined with the China lockdown keep oil bulls back from adding fresh positions.
Speaking of hawkish expectations
Although Christine Lagarde promised gradual tightening at the latest ECB meeting, the hawkish comments from the other members hint that the ECB may not wait too long before raising the interest rates to tame inflation. Swap contracts linked to the short-term euro rates price in a 75bp hike by December, hinting that the ECB would end the bond purchases by July, and hike the rates the same month for the first time, then keep hiking at each meeting until December – unless the economy suffers a severe shock. Due today, the flash PMI data should hint at slowdown in European economic activity due to war.
The hawkish shift in ECB expectations suggests that the upside risks are building for the euro. The EURUSD jumped above the 1.09 yesterday, though the pair is back to 1.0843 at the time of writing. This weekend the final tour of French elections is expected to result in a second term for Emmanuel Macron. If this is the case, we could see the euro gain on Monday, but the upside potential against the US dollar depends on the dollar appetite.
And the Fed is not twiddling its fingers. Jerome Powell said yesterday that a 50bp hike is on the table for the May FOMC meeting, and hinted that the Fed may get even more aggressive in next meetings, backing Bullard’s words that a 75bp hike should not be ruled out earlier this week.
Hot potato game
The US equities were set for a bullish session, but Powell’s speech dampened the mood and sent the S&P500 1.50% lower on Thursday. Nasdaq lost more than 2% to a fresh five-week low. The only thing that could reverse the US equity selloff is earnings. The earnings expectations are certainly pessimistic enough to allow positive surprise on average for the first quarter.
So far, 13% of the S&P 500 companies have reported earnings, and 80% of those who revealed Q1 results surprised to the upside. A strong earnings season could help bulls gaining confidence.
What will certainly make a difference is companies’ ability to pass higher costs on to their clients. The ones that could reflect the higher costs on their final products should outperform.
