Amid the aftermath of the biggest bank failure since the 2008 financial crisis, investors will focus on this week’s U.S. inflation data, which will be a key test for markets already under heavy pressure from concerns surrounding the Federal Reserve’s campaign to control inflation. On the other hand, everything indicates that the European Central Bank will carry out another major rate hike, that the United Kingdom will announce its new budget and that China will publish a barrage of economic data.
Here’s what you need to know to start the week.
1. Risk of contagion
After the dramatic bankruptcy of SVB Financial Group (NASDAQ:SIVBOn Friday, investors are increasingly nervous that the Federal Reserve’s inflation-fighting campaign has exposed vulnerabilities in the financial system that could grow if it intensifies its rate hikes.
SVB, which focuses on tech startups, has seen the value of bonds it had parked on fall due to rising interest rates. The plan to increase the value of its holdings failed and sparked a flood of investment before regulators intervened on Friday, closing the bank and putting it under receivership.
The rapid collapse has caused jitters in global markets and weighed on bank stocks, amid fears of contagion in the financial sector and beyond.
2. US inflation data
While Friday’s mixed U.S. jobs report eased some concerns about the prospect of a 50 basis point rate hike at the Fed’s next meeting, a higher-than-expected inflation reading on Tuesday could reignite fears among investors already embers following SVB’s bankruptcy.
Economists believe monthly inflation has risen by a 0,4% in February, after the rise of 0.5% of the previous month, which would mean an annual increase of 6,0%.
Other economic data to keep in mind this week are the February figures of Retailof Producer price inflationof Housing developments and industrial production.
3. ECB rate hike
The ECB seems poised to raise interest rates by another 50 basis points in its meeting on Thursday, after already raising them 3 percentage points since July, in an attempt to control inflation.
Data showing core inflation in the euro zone rose last month raise concerns that price pressures are persistent.
Markets expect another 50 basis point hike at the ECB meeting on May 4, and the minutes of the ECB’s February meeting have done little to challenge those expectations.
ECB President Christine Lagarde is likely to find herself in the position of deciding how far rates will ultimately rise in the Press conference after Thursday’s monetary policy meeting.
4. UK budget
The British Foreign Secretary, Jeremy Hunt, presents his Spring budget On Wednesday, and following market turmoil in September, when Hunt’s predecessor, Kwasi Kwarteng, and former Prime Minister Liz Truss, unveiled lavish tax cuts, analysts expect Hunt to prioritize keeping public finances stable.
With this in mind, markets will focus mainly on the growth and debt forecasts that will be published alongside the budget.
The Office for Budget Responsibility (OBR) has forecast GDP growth of 1.3% by 2024. The Bank of England expects a slight contraction. A downgrade by the OBR could affect sterling, but the pound moves mainly based on interest rate differentials, as all indications are that US rates will rise more than in the UK.
Britain’s public debt is expected to fall, which could boost the nation’s bonds, although the planned extension of a plan to support household energy costs could be seen as inflationary.
5. China Data
China will release the first data of the year on retail sales and industrial production on Wednesday, which will allow market observers to know whether Beijing’s new 5% growth target is as modest as many analysts believe.
The data comes after Xi Jinping secured an unprecedented third term as president during the week-long National People’s Congress on Friday.
The appointment as premier of Li Qiang, best known for overseeing Shanghai’s strict COVID-19 lockdown measures, is confirmed, replacing Li Keqiang, who is retiring and who is perceived to have been sidelined as Xi tightened his grip on the economy.
Li’s task will now be to guide the resurgence of the world’s second-largest economy. China grew just 3% in 2022, its worst result in decades.