- Inflation concerns on the rise
- Will energy prices fall back?
- FOMC meeting Wednesday
- Bank of England Thursday
- Global PMIs Thursday
Choppy price action continued for stocks as we headed towards the end of the week. After a stronger start on Friday, European indices turned lower and caused US futures to weaken, before bouncing off their lows ahead of the US open. This comes on the back of similar indecisive several days, as investors weighed the risks of surging inflation undoing the recent strong economic recovery, against ongoing central bank support. Will there be more turns and twists later on Friday or early next week?
UoM surveys eyed
Later, we will find out how surveyed consumers felt about the US economy and inflation, as the University of Michigan releases its closely-watched surveys. Inflation expectations have been climbing higher along with actual inflation. If consumers’ inflation expectations rise further, then this can manifest into real inflation, as workers will push for higher wages to compensate for rising prices in order to prevent their real earnings from dwindling. If inflation expectations rise further, then this will likely be bad news for stocks as it would increase the likelihood of the Fed having to taper its QE program faster to avoid overcooking inflation.
In the week ahead, there will be a few major central bank meetings to look forward to, as the US Federal Reserve, Bank of England, Bank of Japan and Swiss National Bank all decide on monetary policy. We will also have a few potential market-moving data, including the latest manufacturing and services PMIs.
Inflation concerns on the rise
Heading into the weekend and looking forward to the week ahead, sentiment is quite cagey. Inflationary pressures have risen sharply due to supply bottlenecks and rapidly rising oil, gas and electricity prices. The intense heatwave in parts of southern and eastern Europe saw demand for air condition and refrigeration rise sharply, just as lockdown measures were lifted in many parts of the region. Calmer weather meant the amount of renewable energy from wind was not sufficient. So, demand for gas has risen significantly to fuel power stations, causing gas stockpiles to fall sharply. Meanwhile, crude oil prices have remained strong owning to the OPEC’s ongoing supply curbs and stronger demand due to the global re-opening.
Will energy prices fall back?
What is not clear yet is whether, when and by how much will energy prices come down again. Expensive energy prices directly impact consumers’ disposable incomes, and indirectly lower their purchasing power through inflation. Rapidly rising energy prices in Europe has forced some factories to halt production. Rising input costs are going to squeeze manufacturers’ margins and hurt their profits. The drop in buying power of consumers will only make things worse. Against this backdrop, the stock market outlook appears uncertain to say the least.
FOMC meeting (Wednesday)
The dollar has not gone anywhere fast, although it has noticeably gained ground against some of the weaker currencies like the euro. Traders are expecting the Federal Reserve to start unwinding QE in the not-too-distant future, which could keep the greenback on the front-foot. At Thursday’s FOMC meeting, all the focus will be on any indications on how soon the US central bank will start to taper its bond buying stimulus programme. But after a weak jobs report, the Fed may decide to wait a little longer before being more open about its tapering plans.
Bank of England (Thursday)
Inflation has surged higher in many parts of the world as a result of the abovementioned factors. The UK’s CPI measure of inflation, for example, jumped to 3.2% year-over-year from 2.0% recorded in the previous month. It is not just headline CPI, but core CPI, RPI, PPI – you name it – everything is going up.
The pressure is thus growing on the Bank of England to act. The BoE is unlikely to hike rates at its meeting on Thursday, but what the market will be watching out for will be any noticeable change in the tone of the MPC that would suggest policy tightening is going to be imminent in the coming months. If that’s the case, we may see a sharp rally in the pound, after the currency spent much of the summer trading in a sideways range.
Global PMIs (Thursday)
Meanwhile the recent trend of economic data from China and the US have not been great, raising fears that the economic recovery is slowing at the world’s two largest economies. European data has been somewhat better, but let’s if weakness from China will weigh on growth here, too. The upcoming PMI data should provide us with good indications about the level of economic activity. As well as keeping a close eye on the headline PMI data, it is worth looking deeper into the reports to see if the indices for prices have accelerated further. As these sub-indices will provide strong indication about future inflation, we may well see a more significant market reaction in response. Further pickup in inflation momentum will make life very difficult for central banks. They will have to tighten their policies to prevent hyperinflation risks. This will not be good news, especially for growth stocks.