Inflation -- and rate hike -- fears have investors wary

05 May 2018, 01:29 | Andres Norman

Moving on up to target

Market Update: Stocks Retreat as Inflation Report Builds Hawkish Case for Federal Reserve

"There wasn't any particular news to get it going other than the Fed staying the course, and that contributed to the slide in stock prices", said Robert Pavlik, chief investment strategist, senior portfolio manager at SlateStone Wealth LLC in NY.

"The description of the inflation target as "symmetric" could be interpreted as a sign that officials will tolerate inflation rising modestly above 2 percent over the coming months", Andrew Hunter, US Economist at Capital Economics, said in a note.

The Federal Open Market Committee chose to keep rates steady at its meeting on May 2, signalling that it will be patient in implementing future hikes.

The statement showed the central bank's confidence over inflation, acknowledging that core inflation rate have moved close to the central bank's 2-percent target.

On growth, they remained pretty much optimistic... It added that risks to the outlook appear roughly balanced, removing a previous reference to "near-term risks". "If.wages come out a little bit stronger than expected, I think the euro tests $1.19", Innes said. The FOMC vote was unanimous, and the next such meeting is scheduled for June 12/13. The uncertainty is about the fourth rate hike. "That's negative for the dollar because ... the dollar needs higher real rates to essentially pull in the funding from the rest of the world". In this regard, the Fed seems to be telling the markets that it won't overreact, possibly because abrupt and aggressive monetary tightening could jeopardize the economic expansion and the ongoing recovery in corporate earnings.

"Markets are pretty much focused on the symmetric language, that's kind of code for willing to let them overshoot their inflation target", said Mark McCormick, North American head of fx strategy at TD Securities in Toronto.

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"Officials remain on course to raise rates again in June and we expect two further 25 basis point rate hikes in the second half of this year", according to Hunter.

Gold is finally trading higher today.

Technology sector results so far " at least from the likes of Amazon, Alphabet, Microsoft, Samsung and SAP" have broadly beaten forecasts for the first quarter, and overall aggregate USA earnings growth is tracking seven-year highs of nearly 25percent.

The euro slipped slightly after the inflation numbers but recovered and rose 0.3 per cent to US$1.9986.

We now look ahead to this morning's inflation data, one of the most significant economic data releases when it comes to European Central Bank policy making. Partly, this support and relief rally in the dollar has already taken place and thus the upside momentum on this front could be limited going ahead.

Anecdotal evidence suggests short dollar bets may be far bigger, thanks to a slow moving allocation away from the greenback in recent years among large institutional investors.

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