U.S. consumer prices rose more than expected in April, adding to inflationary pressures across the economy, weighing on the household sector and prompting the Federal Reserve to raise interest rates sharply. Data released by the U.S. Labor Department on Wednesday showed that the core consumer price index, which excludes food and energy, rose 0.6% month-on-month in April and 6.2% year-on-year. The overall CPI rose 0.3% month-on-month and 8.3% year-on-year, still at its highest level in decades. The biggest contributors to the quarter-over-quarter increase included housing, food, airfare and new cars. The median forecast of economists surveyed by Bloomberg was for the core CPI to rise 0.4% month-on-month and the headline CPI to rise 0.2% month-on-month. While the latest reports suggest that U.S. inflation may have peaked, the figures underscore the breadth of price increases, which, combined with solid wage growth, suggest inflation will remain elevated for quite some time.

Morgan Stanley strategists said the stock market rout is not over yet, with U.S. and European equities still having room for further correction as concerns over slowing economic growth intensify. Strategist Michael Wilson has long been skeptical of the decade-long bull market in U.S. stocks. He said in the report that even after five weeks of declines, the S&P 500 is still misguided in its expectations that current Fed tightening will slow economic growth. Under his "fire and ice" base case, the S&P 500 is expected to decline in the near term before climbing to 3,900 next spring, about 2.5% below current levels, due to slower earnings growth and higher volatility. "We continue to believe that U.S. equities do not reflect expectations of a slowdown in economic growth from current levels," Wilson said in a note on Tuesday. "We expect stock market volatility to remain elevated over the next 12 months." He suggested overweight defensive positions in health care, utilities and real estate stocks.

European Central Bank policymakers are increasingly supporting raising interest rates above zero by the end of the year, according to officials familiar with the matter. Governing council members have moved closer to a 25 basis point rate hike in July, and officials across the various factions are beginning to see at least two further hikes of the same magnitude by January, said the people, who asked not to be identified because the discussions are not public. interest is reasonable. This suggests that ECB policymakers are beginning to move closer to the view of money markets, which are now showing investors betting that the deposit rate will be raised three times by the end of the year from the current -0.5%. The ECB has yet to make a decision on future monetary policy moves. An ECB spokesman declined to comment on the direction of interest rates. Last week, Bank of France governor Francois Villeroy de Galhau publicly endorsed the prospect, saying it was "reasonable" to raise interest rates above zero this year. In an interview last month, Belgian central bank governor Pierre Wunsch said it was “a clear-cut” scenario.

The U.S. budget deficit has shrunk by about $1.57 trillion so far this fiscal year, as a strong economy generates record tax revenues and the cessation of coronavirus relief programs has cut budget spending. The budget deficit fell to $360 billion in the seven months from October to April, according to data released by the U.S. Treasury Department on Wednesday. Budget revenue so far this fiscal year was $2.99 trillion, up from $2.14 trillion a year ago, driven by strong job and wage growth, a Treasury Department official said on a conference call with reporters. Earnings in April, the month of individual tax filings, hit $864 billion, the highest in a single month on record. Year-to-date budget spending fell to $3.35 trillion through April, down from $4.08 trillion a year earlier, helped in part by the end of coronavirus relief programs.

The US and EU plan to continue addressing supply chain and other disruptions. The two sides will begin high-level talks in Paris on Sunday to discuss trade and technological cooperation, expected to forge a united front against Russia. According to a draft joint statement seen by Bloomberg, the two sides plan to announce "the trade and technology committee's intention to develop a common strategy and explore common solutions to improve supply chain resilience and facilitate the predictability and diversification of trade." The trade and technology committee Established last year to cooperate on issues such as export controls and semiconductor shortages, Sunday will be the committee's second meeting. Public opinion leading up to the meeting showed how much has changed over the past few months: The first meeting between the two sides last September was nearly cancelled after the US-Australia nuclear submarine deal sparked a diplomatic spat between the US and France.

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