Financial Markets Face Crisis: Inflation, Central Banks, and Global Risk
Global Financial Market Turmoil and Central Bank Responses
May 22 (Reuters) - World markets remain at the mercy of diplomacy as the Iran war approaches the end of its third month with no clear resolution in sight.
A host of central banks meanwhile brace for their next moves and inflation data piles the pressure on U.S. and Japan policymakers.
Here's your heads-up on the coming week in financial markets by Dhara Ranasinghe, Alun John and Marc Jones in London, Lewis Krauskopf in New York and Rocky Swift in Tokyo.
The Cracks Are Starting to Show
1/ THE CRACKS ARE STARTING TO SHOW
Put aside buoyant tech-driven stocks for a minute.
From sliding Asian currencies to weakening economic activity in Europe and renewed pressure on the world's biggest bond markets, it's clear that the cracks from the war are deepening.
Thirty-year borrowing costs in the systemically-key U.S. Treasury market hit their highest since 2007 this week.
Bond investors believe that central banks won't be able to look past the inflationary shock unleashed by a war that has shut the Strait of Hormuz. And if governments increase spending to buffer consumers, a risk Japan has raised, that will exacerbate debt burdens.
Europe bore the brunt of March's bond selloff. Now it's U.S. Treasuries that stand out, not great if you just took over as head of the U.S. Federal Reserve.
Political Instability and Market Reactions
2/ OUSTED
Turkey's Political Upheaval
Turkey is back on the worry list after a court effectively ousted the main opposition leader Ozgur Ozel.
The case was seen as a test of Turkey's shaky balance between democracy and autocracy and the decision could boost President Recep Tayyip Erdogan's chances of extending his rule.
No surprise, markets are nervous. Stocks have plunged and the lira is at a fresh record low.
The central bank, which halted an easing cycle as the Iran war hits Turkey's energy import-sensitive economy, has already had to sell billions of dollars in forex to ease the fallout.
Central Bank Meetings Worldwide
A host of central banks meet, meanwhile.
Israel
Israel will probably kick off with a quarter point cut to 3.75%, as the 20% surge in the shekel over the last year keeps a lid on the war-fuelled inflation seen elsewhere.
Hungary, Sri Lanka, and New Zealand
In Hungary, where the new post-Viktor Orban government is still getting its feet under the table, rates look set to stay at 6.25% on Tuesday. Sri Lanka's central bank should sit on its hands that day as should New Zealand's at 2.25% on Wednesday.
South Korea and South Africa
On Thursday, South Korea's central bank is expected to keep rates at 2.5% despite growing talk of hikes, whereas South Africa is tipped to hike by 25 basis points due to sharply rising inflation.
Inflation Pressures Intensify
3/ DID ANYONE SAY INFLATION?
U.S. Inflation Outlook
Thursday brings the latest readout of the U.S. inflation outlook in the form of the April personal consumption expenditures price index, the Fed's favoured gauge.
Recent measures showed high readings for consumer and producer prices as higher energy prices weigh.
Investors will also pore over a fresh estimate of first-quarter growth and the latest consumer confidence print.
Corporate Earnings and Consumer Spending
Corporate results from Salesforce, Best Buy and Costco could shed more light on the AI trade and the health of consumer spending, as a robust Q1 earnings season that has boosted U.S. stocks winds down.
Central Banks Ready to Hike?
4/ READY TO HIKE?
Bank of Japan's Policy Outlook
The Bank of Japan has been looking for reasons to normalise monetary policy and Friday's inflation data might provide the evidence they need to continue doing just that.
Markets have grown increasingly certain that the BOJ will hike next month for the first time since December after last month's hawkish hold.
Economists forecast Tokyo's core consumer price index rose 1.5%, a key indicator for the nationwide trend, the same reading as April. That was the slowest pace in four years, but the underlying trend was muddied by government subsidies to households to offset the impact of the Middle East crisis.
Ultimately, analysts expect inflation to rise as oil prices remain elevated and the weak yen raises import costs.
AI and the Future of Financial Sector Employment
5/ 'LOWER-VALUE HUMAN CAPITAL' NEED TO WATCH OUT
Job Disruption from AI
The upheaval AI could wreak on jobs across finance is in focus after Standard Chartered said it would eliminate almost 8,000 jobs by replacing what its CEO Bill Winters called "lower-value human capital" with technology.
Winters later said changes would be handled with thought and care but his remarks emphasised the coming disruption from a technology that can consume and process vast amounts of data, completing tasks previously done by people.
JPMorgan CEO Jamie Dimon and HSBC's Georges Elhedery also warned of job changes due to AI.
Current Trends in Banking Employment
But change looks already underway with a Morgan Stanley survey last week finding that 11% of positions at banks had been eliminated due to AI and 14% not backfilled, though new hires reduced the net loss.
Expect more planning and action in the coming weeks, both operational decisions and PR.
(Graphics by Vineet Sachdev, compiled by Yoruk Bahceli, editing by Gus Trompiz)
