After a slight decline on Wednesday, Wall Street is expected to rise following positive retail sales data. Futures on New York’s indexes signal an opening up 0.09% to 0.19%. The major European stock markets are also up. In particular, the CAC 40 gained 1.35% to 7,311.3 around 12:25 GMT.
The money markets believe that the terminal rate of the U.S. federal funds will peak around 5.3% in July 2023, against 4.50%-4.75% currently. The goal of the rate hike is to avoid inflation and positive retail sales data is encouraging the Federal Reserve’s rate hike policy.
Industrial production and retail sales on the rise
The U.S. Labor Department report shows that U.S. consumer prices accelerated in January, driven by rising rents. The New York Stock Exchange ended Tuesday in mixed order, with only the Nasdaq ending in the green. The Dow Jones index gave up 0.46%, or 164.41 points, to 34,089.40 points, while the S&P 500 fell 0.03% to 4,136.17 points.
This rise in consumer prices is having a direct impact on retail sales and industrial production; several companies have announced results that exceeded expectations, and it is particularly luxury and retail stocks that are supporting the markets. These include Kering, Gucci and Saint Laurent, whose share price rose by 4.19%.
The impact of last month’s price hike on retail sales and industrial production will be closely watched by investors. Optimistic data could then provide a further boost to Wall Street and the European stock market.
Barclays under pressure, pound down
The European news is marked by the fall of Barclays, which published a profit below expectations. This is holding back the Footsie in London. In addition, the deceleration of British inflation has caused the pound sterling to fall.
Impact of inflation on investments
Inflation drives economic activity and when it is too high it can cause long-term damage. While low inflation does not sufficiently promote investment. Therefore, keeping the rate moderate provides a better situation for businesses and encourages investment and economic growth.
However, excessive rate hikes can lead to stagnant activity and stronger sales because production costs then rise faster than revenues. Consumers are also disadvantaged because higher rates reduce purchasing power.
Monetary policy: a matter of timing?
Rising U.S. consumer prices and the very aggressive rhetoric of Fed officials are prompting the central bank to continue its aggressive rate hike policy. However, the politics of timing are essential to avoid causing a slowdown in the economy.
If the Fed wants to keep inflation stable at 2%, which is ideal for stimulating activity and promoting economic development, it must act as soon as demand begins to outstrip supply, which suggests a more rapid rise in prices. On the other hand, if it waits too long it risks seeing the inflation rate rise rapidly and will then have to react more strongly to counter this trend.
In any case, the balance is difficult to strike, and the central bank will need to watch retail sales and industrial production data carefully to take the necessary steps to maintain a reasonable inflation rate.
Listing of major companies positively affected by rising consumer prices:
- Saint Laurent
- British Pound
In conclusion, if the Fed continues to pursue its aggressive rate hike policy, Wall Street and European stock markets could remain higher following positive retail sales and industrial production data. The impact of inflation on economic growth and investment is also a factor to consider and it is important that the central bank finds the right timing to ease monetary policy.