Market Update

Global equity markets began the week positively but turned bearish as the weekend approached, triggered by the European Central Bank (ECB) unveiling plans for higher interest rates in the Eurozone and disappointing US Consumer Price Index (CPI) inflation data for May.
As expected, on Thursday, June 9, 2022, ECB policymakers decided to keep interest rates unchanged. However, what caught our attention were the hints provided regarding the magnitude and timing of future interest rate moves. These insights came from ECB President Christine Lagarde during the accompanying press conference and in the ECB's official statement.
The ECB explicitly stated its intention to raise Eurozone interest rates by 0.25% at its next meeting scheduled for July 21, 2022. Furthermore, given the updated 2022 inflation projections, which climbed to 6.8% (with no expected return to their 2% target until 2024), policymakers indicated their commitment to a "gradual and sustained path" of interest rate increases in subsequent meetings.
Interestingly, while the ECB's statement might appear hawkish on the surface, the July increase is actually smaller than what the financial markets had anticipated. This suggests that policymakers do not share the market's sense of urgency for significantly higher interest rates and align with our view that inflation will recede naturally.
Turning to inflation, the afternoon release of the US CPI inflation data, with a headline reading of 8.6%, weighed heavily on equity market sentiment.
Notably, the bulk of the increase in the headline figure, rising from 8.3% in April to 8.6% in May, stemmed from food and energy prices. Energy costs surged by 3.9% during the month, reaching a 34.6% increase over the past year. US gasoline prices soared by 48.7% compared to a year ago, and food prices rose by 10.1%.
Other contributors to the inflation uptick included airline fares, which surged by 12.6% during the month and are now 37.8% higher than a year ago. This reflects both higher fuel prices and the distortions caused by lower airfares during the coronavirus lockdowns. Used vehicle prices also played a role, with a 1.8% increase in the month and a 16.1% rise over the year, reflecting ongoing supply chain disruptions impacting new car production.
However, it's worth noting that the core CPI reading, which excludes volatile items like food and energy, actually eased from 6.2% in April to 6.0% in May. Federal Reserve (Fed) policymakers have consistently emphasized their focus on core inflation readings.
Fortunately, we won't have to wait long to gauge the Fed policymakers' reaction to today's inflation data, as their next meeting is scheduled for Wednesday, June 15, 2022. Additionally, the coming week features monetary policy meetings at the Bank of England (BoE) on Thursday, June 16, 2022, and the Bank of Japan (BoJ) on Friday, June 17, 2022.
Looking ahead, the upcoming week brings a slate of economic data releases, including UK GDP for April, industrial production figures from the US, UK, Eurozone, and China, UK employment data, US housing data and mortgage applications, retail sales reports from the US, UK, and China, as well as the Empire State Manufacturing survey.