US stock market ended lower on Tuesday erasing previous day’s gains as higher inflation reading spurred concerns the Federal Reserve may hike interest rates in June. The dollar was little changed with the live dollar index data indicating the ICE US Dollar index, a measure of the dollar’s strength against a basket of six rival currencies, closed at 94.534. The Dow Jones Industrial Average lost 1% settling at 17529.98 led by a 2.5% fall in Home Depot (NYSE:HD). The S&P 500 closed 0.9% lower at 2047.2 with nine of ten main sectors finishing in negative territory. Only the energy sector ended higher, recording a 0.2% gain supported by higher oil prices. The Nasdaq Composite dropped 1.3%. Two Federal Reserve district heads - Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams implied interest rates could be hiked at the June 14-15 meeting. They said the decision depends on data. The 0.4% rise in consumer price index in April was bigger-than-expected and the largest gain since February 2013, mainly due to higher gasoline prices. The headline inflation rose 1.1% in the past twelve months, up from 0.9% in March. However, it is still lower than the 2% level the Federal Reserve considers indicative of healthy demand and economic growth.
Federal Reserve’s March meeting results showed policy makers projected two rate hikes this year, but the April meeting statement implied they were in no hurry to further tighten money supply after the rate hike in December as global growth slowed down. While the rise in headline inflation is supportive for the case of hiking the rates at June meeting, investors will be watching closely the release of the personal consumption expenditure - PCE price index, the Fed’s preferred inflation gauge, which is due on May 31. A PCE annual growth rate close to 2% will be a strong confirmation of a likely rate hike. In other economic data industrial production and capacity utilization rose in April, and housing starts rebounded in April after a sharp drop in March. Federal Reserve recent meeting minutes will be released today, which will also provide indication of a likelihood of a rate hike at June meeting. Today at 13:00 CET Mortgage applications will be released by the Mortgage Bankers’ Associations in US. And at 20:00 CET April 26-27 FOMC meeting minutes will be released.
European stocks ended little changed on Tuesday as gains in banks and commodity stocks offset losses in automaker stocks. The euro edged higher against the dollar. The Stoxx Europe 600 ended 0.01% lower after a choppy session. Carmakers suffered heavy losses after HSBC downgraded the sector. BMW (MI:BMW) lost 3%, Peugeot SA (LON:0NQ9) sank 4.1%, Renault (PA:RENA) dropped 3.1%. Germany’s DAX 30 index fell 0.6% to 9890.19, France’s CAC 40 index slid 0.3%. Today at 10:30 CET labor market report will be released in UK. At 11:00 CET April final inflation will be published in euro-zone. The tentative outlook is neutral.
Asian stocks are retreating today after expectations of a rate hike in June following a report indicating rising inflation in US depressed US stock market overnight. Nikkei edged 0.05% lower to 16644.69 today after yen strengthened as data showed Japan's economy expanded at higher than expected 1.7% annual rate in the first quarter, the fastest pace in a year, rebounding from the previous quarter's contraction.
Oil futures prices are falling today after closing at seven month highs on Tuesday on expectations of further easing of global oversupply due to output disruptions in Canada, Nigeria and Venezuela. June West Texas Intermediate crude rose 1.2% to $48.31 a barrel on the New York Mercantile Exchange on Tuesday, the highest settlement since October 9. Investors will be watching closely the US crude oil inventories which will be released at 16:30 CET by Energy Information Administration. According to results of S&P Global Platts’ analyst survey crude oil stockpiles are expected to decline 3 million barrels.