The week starts on a high note: What awaits markets due to curbing inflation

Ivan Kompan

Consumer inflation is expected at 8.3%, the same as last month. What will happen next with the markets and why did China decide to play along with the U.S.?

And again, we will have to wait for the main event of the week until Friday. Last week this was a report on the labor market condition, this week — data on consumer inflation in May.

Both influence the opinions and actions of Fed officials, who now determine the fate of economic growth, inflation, and financial markets in the U.S. and around the world.

The report on the labor market condition turned out to be somewhat more optimistic than expected. The number of people who started working in May was 390,000, well above expectations, but still less than the previous month.

Overall, though, the report showed that the economy is in good condition and the post-pandemic recovery is well under way. However, economic growth is accompanied by inflation, which the Fed is determined to fight.

And now the key issue for investors is whether the Fed will continue to raise 50 bp. in autumn as well or stop at two rises in June and July. But this already depends on what data will come from the macroeconomic fronts. Therefore, we are waiting for Friday, when inflation data will be announced.

Consumer inflation (CPI) is expected at 8.3%, the same as last month. Core inflation, excluding less stable food and energy prices, is likely to slow to 0.5% from 0.6% in April, and in annual terms will be 5.9% — slightly less than 6.2% in the previous month.

If everything happens as expected, it will strengthen the argument that inflation is already over the "ceiling". But even if so, how many more months will it take to bring the inflation rate back to the 2% target?

And most importantly, what steps will the Fed be ready to take to bring inflation back to acceptable levels? So far, the Fed is determined.

Lael Brainard, one of the Fed's most influential managers, said the 50 bp increase at the next two meetings is very likely, and added that "it is now very difficult to find arguments for a pause (in raising rates). A lot of work needs to be done to bring inflation back to 2%"

Will this "lots of work" end in an economic recession and will the markets be sacrificed for price stability? So far, it is difficult to draw a definite conclusion. There are arguments for and against, but the corporate sector is slowly beginning to express concerns about the future of the economy.

Jamie Dimon, CEO of JP Morgan, was joined by Elon Musk, who warned that he had a "super bad feeling" about the state of the economy in the future, and announced his intention to cut 10% of Tesla’s employees.

After that, however, he calmed everyone down, saying that the company plans to continue to grow, but word spoken is past recalling. Although there are many who believe that the economy will slow down and there will be no drop, and the same data on the labor market condition only add arguments to their position.

Oil prices also do not indicate a possible economic downturn. July futures for WTI and Brent were at $120 on Monday morning — the first one a few cents lower, the second one slightly higher, which can hardly be considered a drop in demand.

And Saudi Arabia has also increased the price of its oil in Asia — I do not think that they do this when demand is reduced. So the "trade" in the oil and gas sector is still alive.

Positive news comes from China. The country is starting to bounce back from lockdowns, and The Wall Street Journal has reported that Chinese regulators intend to ease restrictions on Didi Global and two other tech companies who trade their shares in the USA.

The reaction was immediate, with Didi stock soaring more than 50% in premarket trading. And all other Chinese companies confidently turned green after such news.

It seems that the Chinese leadership decided that the trend to destroy financial ties with the United States is not very beneficial for the Celestial Empire and, having demonstrated to the Chinese businessmen "who runs the house", decided to let them go free. And this could be an interesting opportunity because there are a lot of good companies in the "Chinese" segment of the market, and the prices for them are very low at the moment.

What to expect next? This morning the markets are turning green, but in my opinion, in the long term, further decline in the indices awaits us. Too many factors play against the market.