US tech sector saw onslaught of selling orders on Monday, pulling down the universe of risk assets. Nasdaq market cap erased 2.5%, which was the deepest pullback in several months. The rest of equity indices saw less severe declines, however, gloomy sentiment stretched on Tuesday – US equity futures extended decline, strong weakness is also felt in European markets.
Correction in risk assets once again helped greenback to dodge a sell-off. The dollar index bounced off 90 level, however the rebound has fizzled out near 90.35 mark.
Long-term interest rates in the US renewed rally, rising to their weekly high (1.62%).
It’s hard to pin down exact causes of the pullback, however consensus in the media is that anxiety about inflation outlook gained critical mass, provoking sell-off. In fact, in addition to the official data indicating revival of US inflation to the level not seen in a decade, there are some alternative gauges suggesting that inflation rate in the near future may indeed cause economic discomfort. Here is, for example, a comparison of inflation rates and mentions of the word "inflation" in earnings calls of US companies:
The number of mentions soared 800% and considering the correlation of this indicator with inflation rate, the United States can indeed expect a period of relatively high rates of price growth in the near future as firms will likely pass increased costs to consumers. Inflation has also started to appear more frequently in Google searches:
The number of searches of “inflation” is at all-time high signaling that consumers could become more concerned about inflation outlook. This indirectly indicates that consumer inflation expectations are set to increase further, making it even harder for the Fed to call inflation a transitory phenomenon.
If inflation is really a concern for the markets, Wednesday CPI report may become a new catalyst for equities decline if price growth accelerates considerably above forecasts. So, it could make sense to wait and see April inflation print before trying to buy the dip in equities or enter USD shorts.
Key events for the rest of the week:
- Speeches by representatives of the Fed, in particular, FOMC member Lael Brainard on Tuesday.
- OPEC's monthly report, which will include crucial production and demand forecasts for Q3.
- The US CPI report on Wednesday, which could heighten market concerns about high inflation in the near future.
- Bank of England Governor Bailey is scheduled to speak Wednesday at which the UK's QE reduction will be likely discussed.
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