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US PPI data showed less inflation pressure than expected for the month of February. PPI data rose 0.8% in February, slower than the 1.2% rise the previous month, and slower than the consensus forecast of a 0.9% rise. Core PPI came at 0.2%, much below expectations of 0.6%. The better than expected data was enough to send the Nasdaq rebounding 1.2% after heavy losses in the last few days. However, markets are bracing for more inflation pain ahead as since February supply chain issues have intensified because of the war in Ukraine and Covid lockdowns in key manufacturing hubs in China. With inflation running hot, all eyes will be on the Fed tomorrow for clues on the number of hikes, pace, and agenda for balance sheet reduction.

The current reaction of global equities in response to the energy price shock can be partly explained by the sharp increase in the price of oil. Investors are worried that the surge in black gold could pressure consumers' spending and future growth. But how much of a shock does it really have on consumers' wallets? Looking back at the previous crises, data suggest that even with oil prices around USD130, the actual shock on the economy is perhaps less severe than expected. With the current per capita levels much higher than in the past, even oil at USD130 represents a lower share of consumers' wallets (3.0% now vs 4.5% in 2008 and 6.5% in 1980). Investors are nervous as uncertainty remains high but oil at USD130 is perhaps unlikely to hurt US consumer spending appetite as much as expected. 

Markets remain nervous this morning with stocks in Hong Kong losing 5%, while European and US stocks are rebounding half a percent or so. All eyes are on the Fed this week, as it is expected to proceed with a 0.25% interest rate hike on Wednesday, the first hike since the pandemic began. Investors will be watching to see what the central bank has to say about inflation and the economy, as well as its projections for future rate hikes. A particularly worrying sign, the 2-year US Treasury yields are advancing fast (now at 1.79%), inching closer to US 10-year yields which stand at 2.05%. In other words, bond markets are starting to get closer to pricing a recession, as the yield curve is near inversion. This week will be key for signs of what the Fed has to say and how markets react to it.

The outlook for European stocks is brightening with Stoxx50 futures climbing slightly. What marked this week is the high volatility, with significant intraday swings and back-to-back moves of more than 6%. The ECB’s decision to accelerate the winding down of its asset purchase program gave way to uncertainty over the timing. The sentiment is improving slightly overall as commodities, and oil particularly is pulling back. However, traders remain nervous with elevated fear in the market. The VIX index remains above 30, the highest since October 2020.

The US inflation data was inline with expectations, with core CPI up 0.5% month over month and up 6.4% yearly. Despite being the highest in 40 years, It is considered to be a minor positive development considering the cautious market sentiment this morning. Leading the inflation numbers, energy prices saw a big jump, up 3.5% month over month, versus +0.9% in the prior month.  February CPI data however is backward-looking as it doesn't take into account the recent spike in commodities, as a result of the Ukraine/Russia war. Surging inflation continues to complicate the Fed's job, which is expected to push forward with rate hikes and balance sheet reduction.