Marketmind: Cautious markets focus on central banks’ diverging paths

12:35 am Thursday, April 20th, 2023

A look at the day ahead in European and global markets from Ankur Banerjee

Investors have hunkered down in Asian hours with stocks drifting while the dollar clings to gains from overnight. The prevailing anxious mood is likely to continue as we head into the crucial next few weeks of central bank meetings.

A Reuters poll of economists showed the Fed is expected to deliver a final 25-basis-point rate increase in May and then hold rates steady for the rest of the year. Markets also expect that hike but anticipate some cuts towards the end 2023.

The Bank of England on the other hand will likely need to stay on its hawkish path as data through the week showed that British inflation remained hot. According to data released on Wednesday, Britain was the only country in western Europe with double-digit inflation in March, after a more modest decline than had been expected.

Investors are now fully pricing in a quarter-point interest rate rise to 4.25% on May 11 at the BoE’s next meeting and expect rates to peak at 5% by September, according to futures markets.

The differing strategies on opposite sides of the Atlantic have recently pushed sterling and the euro to multi-month highs and investor attention will likely remain on where European currencies go next.

Meanwhile, New Zealand’s consumer inflation came in below expectations in the first quarter but remained near historic highs, reinforcing bets of another interest rate hike in May.

Australia’s central bank will get a new specialist board to manage monetary policy, which will be chaired by the governor but have independent expert members with more power over the setting of interest rates.

Elsewhere, shares of Tesla slid after the EV maker posted its lowest quarterly gross margin in two years, missing estimates. Elon Musk doubled down on the price war he started at the end of last year, saying Tesla would prioritise sales growth ahead of profit in a weak economy.

(Graphic: Tesla Earnings image – http://fingfx.thomsonreuters.com/gfx/rngs/TESLA-RESULTS/010010144FX/tesla.jpg)

(Graphic: Rates and inflation Rates and inflation – https://www.reuters.com/graphics/USA-FED/INFLATION/gkvlgnaywpb/chart.png)

Key developments that could influence markets on Thursday:

Economic events: Germany March PPI, Eurozone April consumer confidence, France April manufacturing confidence

(Reporting by Ankur Banerjee in Singapore; Editing by Edmund Klamann)