The cut in mortgage rates by Chinese banks early this morning has improved market sentiment around the world. However, the past few weeks have taught us that the half-life of sentiment improvement due to Chinese stimulus measures is rather short. Overall, the picture of the market remains nervous and battered. The Fed intends to curb demand to ease inflationary pressures, but investors see the economic risks associated with this policy. The Federal Council debate over the 9-euro ticket is at the very top of the agenda.
this inflation rate they are tall. Too high. The US Federal Reserve is trying to counteract this phenomenon by tightening monetary policy to tighten financial conditions, cool the real estate and labor markets, and suppress aggregate demand in general. By their nature, these rules impact on corporate earnings prospects, prompting investors to be more cautious about their equity exposures.
We can see the first signs of success Fed Policy. In the labor market last week, there was a slight upward trend in new applications for unemployment benefits, although the level of 218 thousand. recent applications is still very low. In the housing market, home starts have fallen in three of the last four months, building permits have fallen by more than 3% in April, and sales of new and existing homes have fallen by 13-14% in the last three months. The Real Estate Activity Index (NAHB) recorded one of the sharpest declines in 20 years in April (ignoring the Corona epidemic in spring 2020). While US consumer sentiment has deteriorated, their propensity to buy remains strong, as evidenced by retail sales data for March and April. So far, high inflation rates appear to have led to changes in the pattern of consumption rather than to an overall contraction in demand.
At some point, the Fed will judge inflation and the economic outlook in such a way that it will adjust the tightening cycle accordingly. This could be the (subjunctive) point where market sentiment has hit bottom. Perhaps this is where the old pun could also apply: market movements now conform to the ‘bad news is bad news’ principle. When the time comes when bad news makes investors expect a more dovish Fed stance, we may have reached the point where we say bad news is good news.
Positive interpretation of the report this morning China, where commercial banks cut the benchmark 5-year lending rate by 15 basis points from 4.60% to 4.45%. This step is primarily intended to help stabilize the demand in the real estate market. As a result, US stock futures turned out to be positive and European markets started the day with well over half a percent increase. In the bond market, meanwhile, we are seeing a continuation of the trend from the last few days, according to which yields fluctuate quite strongly on a daily basis, but overall this is only a sideways trend. This pattern seems to confirm our suspicions that investors are currently not motivated to further raise their ambitious expectations for tightening cycles by the Fed and the ECB.
On day schedule today data on consumer sentiment in the UK and the euro zone are coming. Data from the UK last night showed the worst sentiment since the survey began in 1974. Euro area consumer sentiment is likely to at least stabilize at low levels. If the Federal Council votes today in favor of a 9 euro ticket and a temporary reduction in fuel taxes by up to 30 cents, it could at least temporarily put a smile on consumers’ faces …
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The article about the Federal Council vote on the 9 euro ticket appeared for the first time on the onemarkets blog (HypoVereinsbank – UniCredit Bank AG).