Inflation expectations remain persistent in the United States

Despite the better-than-expected earnings reports of major banks in the US on Friday, the markets ended the day with losses due to lower-than-anticipated U.S. retail sales for March and preliminary results of the University of Michigan’s consumer survey revealing an increase in inflation expectations.

On Friday, Wall Street indexes closed the day with losses in the United States. The Dow Jones index fell by 0.42%, the Nasdaq index fell by 0.35%, and the S&P 500 index ended the day with a 0.21% decline.

Brent crude oil closed last week at $86.3 per barrel. The US dollar index closed last week with a 0.5% drop at 101.6. The 10-year Treasury yield in the US ended last week at 3.52%, up by 12 basis points The U.S. 2-year Treasury yield, which is more sensitive to developments in monetary policy, closed last week at 4.1%, up by 12 basis points.

On the US side, the S&P Global Manufacturing and Services sector leading PMI data for April will be monitored on Friday, which will provide a signal about the last outlook of economic activity. The manufacturing PMI, which had been in the contraction zone below the 50 threshold level for the fifth consecutive month, despite indicating that the rate of contraction in the manufacturing sector had slowed down by rising from 47.3 to 49.2, had continued to decline, particularly with the negative impact of high interest rates and inflationary pressures on demand, as new orders continued to decline due to the tenth consecutive month of falling export orders. The services PMI, on the other hand, had accelerated the growth in the service sector by rising from 50.6 to 52.6, but had been in the growth zone for the last two months. New orders in the United States had increased for the first time since September of last year, and domestic demand had continued to support the growth in the service sector, despite the decline in new export orders.

The New York Fed Empire State Manufacturing Index, which will provide a signal about the course of the manufacturing industry, will be monitored today. In March, the index had fallen significantly from -5.8 to -24.6, well above expectations. Looking at the details, there had been significant declines in the sub-indices for current and future general business conditions. It is expected that the index will continue to show weakness in the negative zone, continuing the slow down of the contraction in the manufacturing sector, with a partial recovery to the -18 level in April.

Job market data, the weekly initial jobless claims, will be monitored on Thursday. The figures had risen slightly above expectations from 228,000 to 239,000 persons, but had continued to follow a low trend, indicating a tight outlook in the job market.

In addition, housing starts and building permits, which are an indicator of future housing demand, and existing home sales will be monitored on Thursday. While a 3.1% monthly decrease in housing starts and a 6% decrease in building permits are expected in March, existing home sales are also expected to indicate a slowdown with a 1.8% decrease in the housing market.

On Wednesday, the Fed’s Beige Book report will be published. The report will include current evaluations and future assessments of the US economy.

European stock markets closed the day with gains between 0.4% to 0.6%.

On the European front, the focus of the markets will be on the release of the minutes from the ECB’s Monetary Policy Meeting on March 15-16, which will come out on Thursday. At its last meeting, the ECB increased interest rates by 50 basis points in line with expectations and did not signal any interest rate decisions for future meetings. In addition, the decision text stated that inflation is expected to remain very high for a long time.

Also on Friday, investors will be watching the S&P Global manufacturing and services PMI data in April for an indication of the latest economic outlook across Europe.

Inflation data that will also impact the monetary policies of both the ECB and the Bank of England, will be released on Wednesday, including the final March CPI data for the Eurozone and the March CPI data for the UK. In March, Eurozone headline CPI increased by 0.9% on a monthly basis, while on a yearly basis it decreased from 8.5% to 6.9%, reaching its lowest level since February 2022. Expectations were for a decrease to 7.1%.

On Thursday, producer price index (PPI) for March will be monitored for Germany.

China GDP growth data for Q1-2023 and the China interest rate decision to monitor

On the Asian front, tomorrow in China, data on the course of economic activity will be released with the announcement of the March industrial production, retail sales, and fixed asset investment figures. The February data on the course of economic activity in China indicated a mixed picture of the economic outlook in an environment where coronavirus restrictions were lifted. In February, the growth rate of industrial production was below expectations and the unemployment rate rose from 5.5% to 5.6%.

While there were indications of a recovery in the Chinese economy, it was not sharp, and authorities indicated that they could continue to support the economy. With the continued positive effects of the government’s easing of pandemic restrictions on economic activity and demand, and with the support of government incentives and investments, it is expected that there will be an increase in the year-on-year growth rates of industrial production, retail sales, and fixed asset investment in March, and a decrease in the unemployment rate. In addition, China GDP growth data for the first quarter of 2023 will also be monitored tomorrow. The Chinese economy performed above expectations in the last quarter of last year, recording stagnant quarterly growth at 0% (expectations were for a 0.8% decline) and a slowdown in annual growth rate to 2.9% (expectations were for 1.8% growth).

The People’s Bank of China’s interest rate decision will also be announced. Last month, the People’s Bank of China kept the 1 and 5-year loan prime rates (LPR) unchanged and preferred to monitor the effects of monetary easing measures.