Sprint of European equity markets at the start of the session (+ 1.42% in the Dax, + 1.39% in the Cac40, + 0.86% in the Ftse100 and + 1.59% at 24,689 points in the Ftse Mib) in the wake of the closing positive yesterday on Wall Street. This morning the futures are more secluded (+ 0.23% the Dow Jones and + 0.30% the S & P500) while expectations for a more substantial rate hike by the Federal Reserve are cemented at the next meeting with the Treasury yield US 10-year increase to 2.658%. From the examination of the minutes of the Fomc and, in fact, it emerged that many exponents would have preferred a rise of 50 bp last March 16. Furthermore, all participants did not fail to note the rise in inflation.
“Considering that price growth shows no signs of cooling down, it is possible that in the meeting of 3 and 4 May next, the rate hike could be 50 bp. In addition to this, the Fed also seems ready to tighten even more. . Almost certainly immediately after the meeting, the Fed will begin the reduction of the securities portfolio, approximately 9 trillion dollars to date, at a rate close to 95 billion per month of which 60 billion of government bonds and 35 billion of mortgage backed securities “, has foreseen Antonio Tognoli of Integrae Sim.
While this is not a surprise, because the markets had already been warned, what surprised were the words of the vice president, Lael Brainard, who has long been a dove and has now taken a stance in favor of a rapid, not just quantitative, tightening. but also in terms of rate hikes. “The markets, however, appear to have responded in a non-negative way to the Fed’s attempt to cool price growth: the spread between five-year yields and inflation-linked yields of the same duration (breakeven) dropped to 3 , 28% from 3.59% on March 25. The level is not yet satisfactory, but which, however, signals a cooling of expectations “, Tognoli specified.
So, the markets have faith in the Fed, but on the other hand they expect it to act quickly. “Core inflation, which the Fed looks at, is at 5.4% against an average target of 2%. Unlike Europe, where price growth is driven by costs, in the US the component linked to the demand, supported by the cost of labor which has increased on average by 6.2% in the last 12 months. In this case, the Fed’s attitude is able to guide the economic trend, unlike the ECB struggling with cost inflation, against which it can do very little. And this is the risk that the rise in interest rates will slow down economic growth to the point of sliding towards recession “, warned Tognoli.
Recession, thanks to the war in Ukraine which continues to push raw material prices to new records. Today the president of the European Commission, Ursula von der Leyen, and the head of European foreign policy, Josep Borrell, are expected in Kiev, where they will meet the Ukrainian president, Volodymyr Zelensky, who denounced that the situation in the Ukrainian city of Borodyanka is “worse” than that of nearby Bucha, where at least 300 civilians were reportedly killed by Russian forces.
As for the EU sanctions in Moscow, if the European ban on Russian coal comes into force at full capacity from mid-August, a month later than expected, due to German pressure, some companies in Japan and South Korea have blocked coal imports from Moscow. The war will also weigh on Italy’s 2022 GDP which, according to a Mediobanca study, imports 38% of its gas from Russia. This morning the BTP / Bund spread drops to 164 basis points with the yield of the ten-year BTP down to 2.305%. In yesterday’s session, the Reuters agency reported, after the minutes of the ECB from which hawkish tones emerged, the yield of the Italian ten-year was pushed to a whisker from 2.40%, retouching the maximum from 18 March 2020. Pending the details of the medium-long term placement of Wednesday 13, which will be announced tonight, yesterday the Treasury announced that it will offer 6.5 billion euros of 12-month BOTs in Tuesday’s auction. (All rights reserved)
