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On Wednesday, the three major U.S. indexes essentially gave up on Tuesday’s gains, as investors eagerly await Friday’s U.S. consumer price index data. Meanwhile, the Organization for Economic Co-operation and Development (OECD) has cut its outlook for global growth to 3% for 2022, down from a December forecast of 4.5%.
On Thursday, the European Central Bank laid out plans to hike interest rates for the first time in more than a decade as the central bank seeks to tackle rising inflation in Europe. In response to the announcement, North American indices opened lower and fell sharply late in the session. As of Thursday’s close, the Dow fell 638 points, while the S&P 500 and Nasdaq plunged 98 and 332 points, respectively. In Canada, the TSX lost 228 points, weighed down by healthcare and energy stocks.
Finally, according to a Reuters poll, economists surveyed expect inflation to have remained stable at 8.3% in May. The official CPI report is expected to be released on Friday morning.
Markets lose ground
For the four trading days covered in this report, the Dow Jones fell 627 points to close at 32,273, the S&P 500 fell 90 points to 4,018, while the tech-heavy Nasdaq lost 259 points to close at 11,754. In Canada, the TSX fell 227 points to close at 20,564.
Strategy
US inflation hit a new 40-year high in May
US inflation hit a new 40-year high in May as widespread pressures continue to push prices higher. The CPI unexpectedly accelerated to 8.6% year on year in May, beating consensus expectations for an 8.3% gain and up from the April reading of 8.3%.
Record gasoline prices, coupled with relentless food and housing costs, are putting severe pressure on Americans’ cost of living, suggesting the US Federal Reserve is likely to continue its path of 50 basis point rate hikes. basis throughout the summer and possibly into the fall. Energy prices climbed 34.6% from a year earlier, the highest since 2005, including a nearly 49% rise in gasoline costs. So far, gasoline prices in June have hit new highs, signaling upward pressure in upcoming CPI reports and thus keeping the Fed on its current course.
Grocery prices rose 11.9% annually, the most since 1979, while electricity rose 12%, the most since August 2006. Rent for the primary residence rose 5.2 % over the previous year, the most since 1987. Air fares increased by 12.6%. in May, a slight moderation from the previous month, but still the highest on a yearly basis since 1980. Prices for hotel stays, meanwhile, rose 22.2% year-on-year ‘other. Used car prices, which had slowed in recent months, rose 1.8% in May, the highest this year. Prices for new vehicles rose 1%.
Next Wednesday’s policy decision is accompanied by new summary economic projections and a new Dot Plot. Growth may be revised down but the group’s inflation forecast will most likely be raised and we believe it is possible that the Dot Plot will show a higher terminal policy rate for this cycle. While a 75 basis point hike is possible, we believe it is unlikely given the number of indications issued by Fed members for 50 basis point hikes in June and July.
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