Marketmind: Collateral damage

A look at the day ahead in markets from Sujata Rao

There it is: an admission from a central banker that rapid policy tightening may cause a hard landing for economic growth — Federal Reserve Governor Chris Waller described rate hikes as a “blunt force” tool that may act like a “hammer”, causing collateral damage to the economy.

Well, markets at least have already been enduring the collateral damage. Global stocks are down 8.5% this year while Treasury 10-year yields are up around 130 basis points. Yields climbed on Tuesday to a new three-year high, while German 10-year borrowing costs are already at seven-year peaks.

The worst of the growth damage is still confined to Europe. Germany’s ZEW investor confidence index due later in the day is projected to fall further, after last month posting the biggest monthly drop on record.

The hope now is that the threat of rate hikes and tighter financial conditions will start to put a lid on inflation. March U.S. consumer inflation is expected later on Tuesday at above 8 year-over-year, following a 7.9% reading for February.

U.S. factory inflation, on Wednesday, is seen surging above 10%, though many reckon this could be the peak. In any case the data is likely to seal a 50 basis-point Fed rate hike next month.

Inflation expectations rise

Inflation pressures are everywhere, in fact, even in Japan which earlier in the day reported record wholesale price growth, while Britain’s three-month jobless rate fell to 3.8% — it last fell below that level in 1974.

Markets appear set for another brutal session — European bourses are opening as much as 1% lower.

Investors will keep a close watch on U.S. “real” interest rates; deeply negative rates have made stock market investments a no-brainer. Now though, real 10-year rates (after inflation is stripped out) are now steadily climbing toward 0%, a level last touched in 2020.

CPI

Key developments that should provide more direction to markets on Tuesday:

-Australia business conditions surge in March, inflation runs hot

-UK jobless rate falls further

-UK retailers see sales slow as cost pressures rise

– OPEC tells EU it’s not possible to replace potential Russian oil supply loss

– Germany ZEW index

– U.S. Treasury 10-yr bond sale

– U.S CPI March 

(Reporting by Sujata Rao; editing by Dhara Ranasinghe)