By abandoning forward guidance in favor of a resolutely "data-dependent" approach, the FED has chosen to leave investors in the dark, with little visibility is very probably where the FED is at as well, on the major determinant of its monetary policy: inflation.
As we mentioned during our last weekly meetings, the publication of inflation figures for January in the United States was therefore of particular importance because it should serve to better anticipate future monetary policy across the Atlantic. The data published last Thursday once again surprised on the upside since inflation over 1 year came out at 7.5% (against 7.3% expected and 7% the previous month). Moreover, the monthly data still shows no signs of slowing (0.6% over the month against 0.4% expected), which suggests that peak inflation has not yet been reached. Indeed, while the most volatile elements continue to rise (+0.9% in January for food and energy), the components of the "core basket" are experiencing differing developments. In services, the rise in prices continues to spread (a factor to be watched closely) even if it should be noted that, in goods, they fell slightly (1% over the month against 1.2% in December) thanks to a lull in the price of new cars due to the increase in automobile production.
Although the financial markets had rebounded rather well at the beginning of last week between good corporate results and closing of short positions, the reaction was not long lived as they were followed the publication of inflation figures. Investors immediately revised their expectations of a Fed rate hike this year. The market now expects to a majority a double increase (+50 bps) for March against around 30% a week ago (before the inflation figures) and 7 rate increases overall for this year. At the same time, US long rates logically accelerated upwards, breaking 2% for the first time since mid-2019, thereby reinforcing the factor rotation movement on the equity markets.
At the same time, the instability of the situation in Ukraine adds “noise” to a market that is struggling to find positive catalysts. While it is difficult to measure the direct impact on the performance of the markets, which are certainly more disturbed by questions around inflation, this nevertheless contributes to the ambient gloom. This is what has helped to curb the rise in interest rates.
Finally, after their change to a more hawkish tone, several members of the ECB were forced to step up following the runaway on rates in the wake of US movements. As Europe could not afford a sharp contraction in financing conditions, particularly for peripheral countries. Memories of the 2011 crisis are indeed never far away.
