Image Source: Pixabay
 

The January PCE data released Friday, one of the Fed's favorite inflation indicators, showed an unexpected increase in price pressures. The PCE index rose by 0.6% in the last month, and the annual rate was 5.4%. This is negative data, indicating that inflationary pressures remain high. Thus, Fed policymakers have no choice but to maintain an aggressive stance longer. At the close of the stock market on Friday, the Dow Jones Index (US30) decreased by 1.02 (-2.55% for the week), and the S&P 500 (US500) fell by 1.05% (-2.63% for the week). The Nasdaq Technology Index (US100) was down by 1.69% on Friday (-3.25% for the week).

Cleveland Fed President Loretta Mester said that the latest inflation report is consistent with the fact that policymakers need to "do a little more" to make sure inflation is down. Her Boston colleague, Susan Collins, said the Central Bank needs to keep raising rates to get them to a restrictive level, and the Fed may have to hold them at that level for an "extended" period.

Strong labor market data combined with persistently elevated price pressures have increased expectations for the Fed's interest rate cap, raising it to 5.39%, which suggests three additional 25 basis point hikes during the spring and summer. The higher peak in borrowing costs is supporting Treasury yields, which in turn is driving the dollar index higher and stock indices lower. And the current dynamics are unlikely to change anytime soon.

The Bank of Canada predicts that inflation in the country will fall to about 3% by mid-2023 and fall back to the 2% target in 2024. Most private sector economists also forecast similar numbers. But the forecasts come with a major caveat: Canada must be protected from unexpected global events that could cause a new rise in inflation.

Equity markets in Europe were mostly down on Friday. German DAX (DE30) shed by 1.72% (-2.03% for the week), French CAC 40 (FR40) lost 1.78% (-2.36% for the week), Spanish IBEX 35 (ES35) was down by 0.11% (-1.40% for the week), British FTSE 100 (UK100) fell by 0.37% (-1.57% for the week).

On March 16, the ECB will almost certainly raise the interest rate by 0.5%. And it is already in the price. But what is important is how the ECB will behave at the next meetings. Analysts believe that another likely decline in the overall level of inflation in the euro area caused by energy is unlikely to reassure ECB policymakers, as core price pressures are still elevated. Deutsche Bank analysts are now forecasting the ECB rate to peak at 3.75% in June. Bank of France Governor François Villeroy de Galhau tried to refute such expectations. Still, his German colleague Joachim Nagel said Friday he did not rule out further "significant" rate hikes after March.

The United Kingdom marked the anniversary of Russia's invasion of Ukraine with new sanctions against Russia. A ban on Russian iron and steel products followed the ban on oil exports. The British government also said it would target aircraft parts, radio equipment, and electronic components. This could severely damage Russian airlines, which mostly have European and American planes. The US would also impose a 200 percent duty on all imports of Russian-made aluminum, which could affect global supply chains. Treasury Secretary Janet Yellen warned China and other countries against providing material support to Russia, saying any such action would amount to sanctions evasion and would "prove very serious consequences."

Gold prices were under pressure last week due to the prospect of higher interest rates and a stronger US dollar. Gold and silver are inversely correlated to government bond yields. In periods of rising interest rates, government bond yields are rising, putting downward pressure on precious metals. For the resumption of a trend for gold and silver, it is necessary that government bond yields at least stop rising and, at the most, start to fall. And for that, the US Federal Reserve should stop tightening its policy. Considering the time lag, the bullish trend in gold will return when the market is dominated by the sentiment that the US Federal Reserve is about to "press pause." And that won't happen until late spring or early summer.

Asian markets mostly declined last week. Japan's Nikkei 225 (JP225) decreased by 0.11% for the week, China's FTSE China A50 (CHA50) lost 1.16%, Hong Kong's Hang Seng (HK50) fell by 3.25%, India's NIFTY 50 (IND50) was down by 2.61%, and Australia's S&P/ASX 200 (AU200) was negative by 0.54% for the week.

Australian Prime Minister Anthony Albanese called on the country's major banks to raise deposit rates for depositors amid fears that higher interest rates are being passed on entirely to borrowers. The country's competition watchdog began investigating the issue this month, saying that the deposit interest rate hikes were "smaller and less consistent" than the mortgage interest rate hikes. This means that ordinary people in Australia are caught on two fronts. This has also led to criticism of RBA Governor Philip Lowe, whose term expires in September, and there is a high chance Lowe will not be re-elected.

In the commodities market, futures on natural gas (+13.71%), gasoline (+7.24%), orange juice (+6.36%), lumber (+4.82%), and cotton (+4.36%) showed the biggest gains last week. Futures on wheat (-7.31%), palladium (-6.4%), silver (-4.49%), corn (-4.17%), and copper (-3.7%) showed the biggest drop.

• S&P 500 (F) (US500) 3,970.04 −42.28 (−1.05%)
• Dow Jones (US30)32,816.92 −336.99 (−1.02%)
• DAX (DE40) 15,209.74 −265.95 (−1.72%)
• FTSE 100 (UK100) 7,878.66 −29.06 (−0.37%)
• USD Index 105.26 +0.66 (+0.63%)
   

Important events for today:

• US Durable Goods Orders (m/m) at 15:30 (GMT+2);
• US Pending Home Sales (m/m) at 17:00 (GMT+2).

More By This Author:

The New Governor Of The Bank Of Japan Will Maintain A Loose Monetary Policy
Analytical Overview Of The Main Currency Pairs - Thursday, Feb. 23
Analytical Overview Of The Main Currency Pairs - Wednesday, Feb. 22