Mixed Signals Leave Markets Directionless as Debt Limit Crisis Looms in US
Investors have struggled to find direction in the markets as mixed signals continue to emerge from central bank officials and macroeconomic data influences. In the US, the Consumer Price Index (CPI) increased by 4.9% in April on an annual basis, just below market expectations, while annual inflation fell to its lowest level since April 2021. Despite these figures, the Richmond Fed President stated that inflation remains stubbornly high. Meanwhile, there is less than a month left for the federal government to reach the $31.4trn debt limit and run out of cash, a situation that could have serious repercussions for the global economy if not resolved. National Security Adviser Jake Sullivan’s talks in Vienna with China’s most senior diplomat hinted at the possibility of a normalisation of relations between the two countries. However, the ongoing banking crisis in the US continues to affect risk appetite.
In Europe, the focus for investors is the inflation data due to be released in the upcoming week. While the Bank of England increased interest rates by 25 basis points to 4.5%, in line with expectations, the European Central Bank (ECB) has continued to send out mixed messages. ECB members have made “hawkish” statements on inflation, whilst the bank is expected to raise interest rates with an 85% probability at next month’s meeting, according to analysts. Meanwhile, economic activity continues to slow down in the Eurozone, despite high inflation rates. Industrial production fell below expectations in Germany, whilst in the UK, although industrial production exceeded expectations, the foreign trade deficit was 16.4 billion pounds in the same period. Euro/dollar parity closed the week 1.5% below its previous close.