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Top 5 things to watch in markets in the week ahead

Amid the fallout from the biggest bank failure since the 2008 financial crisis investors will be focusing on U.S. inflation data in the coming week that will be a key test for markets already under pressure from worries over the Federal Reserve’s campaign to tame inflation. Elsewhere, the European Central Bank is expected to deliver another big rate hike, the U.K. is to announce its latest budget and China is to release a flurry of economic data. Here’s what you need to know to start your week.

Contagion risk

In the wake of Friday’s dramatic collapse of Silicon Valley Bank (NASDAQ:SIVB) investors are growing nervous that the Fed's campaign to fight inflation has exposed vulnerabilities in the financial system that could grow if it ratchets up its rate hikes.

SVB, which focuses on tech startups, saw the value of bonds where it had parked its money fall due to higher interest rates. A plan to boost the value of its holdings backfired, prompting a run on the bank before regulators stepped in on Friday, shuttering the bank and putting it in receivership.

The rapid collapse sent jitters through global markets and walloped banking stocks amid fears over contagion in the financial sector and beyond.

"The concerns emanating from the financial sector are rippling across the market in general,” said Michael James, managing director of equity trading at Wedbush Securities. “When you combine the debacle of Silvergate (NYSE:SI) with the collapse of Silicon Valley Bank ... that's creating a ripple effect of concern for the overall market stability."

U.S. inflation data

While Friday’s mixed U.S. jobs report eased some worries about the prospect of a 50-basis point rate hike at the Fed’s upcoming meeting, a hotter-than-expected inflation reading on Tuesday could reignite fears among investors already on eggshells following the failure of SVB.

Economists are expecting monthly inflation to rise by 0.4% February after a 0.5% increase the prior month for an annual gain of 6.0%.

Last week Fed Chair Jerome Powell said the U.S. central bank is likely to raise rates higher than previously expected if upcoming data shows that the economy remains hot after almost a year of tightening, but added that no decision has been made yet about the upcoming March meeting.

Other economic data to watch in the coming week includes February figures on retail sales, producer price inflation, housing starts and industrial production.

ECB rate hike

The ECB looks set to hike interest rates by another 50 basis points at its meeting on Thursday after already raising rates by 3 percentage points since July in a bid to tame inflation.

Data showing that underlying inflation in the Eurozone ticked higher last month added to concerns that price pressures are proving persistent.

Markets are pricing in another 50-basis point hike at the ECB’s May 4 meeting and the minutes of the ECB's February meeting have done little to challenge those expectations.

"Core inflation and other measures of underlying inflation were likely to be stickier, with only limited evidence of a stabilization so far," the ECB minutes said. "Further increases were required for the Governing Council’s policy rates to enter restrictive territory."

ECB President Christine Lagarde will likely be put on the spot on how high rates will ultimately go at Thursday’s post-policy meeting press conference.

U.K. budget

Britain's Chancellor Jeremy Hunt delivers his Spring Budget on Wednesday and after the market turmoil in September when Hunt's predecessor Kwasi Kwarteng and former Prime Minister Liz Truss unveiled lavish tax cuts, forecasters expect Hunt to prioritize keeping public finances steady.

With that in mind, the main focus for markets will be on the growth and borrowing forecasts to be released alongside the budget.

The Office for Budget Responsibility has predicted 1.3% GDP growth for 2024. The Bank of England forecasts a slight contraction. An OBR downgrade might affect sterling, but the pound is moving mainly on interest rate differentials, with U.S. rates expected to rise further than in the U.K.

U.K. government borrowing is expected to fall, potentially supporting gilts, but an expected extension to a scheme to support household energy costs may be viewed as inflationary.

China data

China is to release the first retail sales and industrial production data of the year on Wednesday which will give market watchers some insight into whether Beijing’s new 5% growth target is as modest as many analysts think.

The data comes after Xi Jinping secured a precedent-breaking third term as president on Friday during the week-long National People's Congress.

Li Qiang, best known for overseeing Shanghai's strict COVID-19 lockdowns was confirmed as premier, replacing the retiring Li Keqiang, widely perceived to have been sidelined as Xi tightened his grip on the economy.

Li's task now will be guiding the re-emergence of the world’s second largest economy. China grew just 3% in 2022, its worst showing in decades.


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