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It was a downbeat week in financial markets with stock markets ending sharply lower. Friday’s hotter-than-expected US inflation data scotched hopes that price pressures were easing. In turn, market bets of how far the US Federal Reserve will lift interest rates to curb runaway inflation are setting new cycle highs. The US Treasury 2-year yield, which closely maps Fed Funds futures, has hit the 3% level, its highest since 2008.
We get a glut of major central bank meetings this week, including the Fed, the Bank of England, the Bank of Japan and the Swiss National Bank. The latter is quite often ignored with it having the lowest rates across the G-10 at -0.75%. But even this uber-dovish institution has become more hawkish in recent weeks, noting rising inflationary pressures. The market gives the SNB an 80% chance of a rate hike this week.
Of course, the main event will be Wednesday’s FOMC meeting and Fed Chair Powell’s press conference. After the consensus-beating inflation data with the all-important monthly prints way above estimates for the headline, some Wall Street analysts now forecast a 75bp hike at this meeting, above the already priced in half point rate rise. Money markets, as at the time of writing, implied a 25% chance of this thunderbolt happening. A key focus will be the Committee’s Summary of Economic Projections (“dot plot”) and the terminal point for the Fed Funds rate.
The priority is clearly to continue front-loading rate hikes and to quash inflation, in place of concerns about growth. This means investors are increasingly fixated about recession risk, with last week’s hawkish pivot by the ECB was just another nail in the coffin for global bulls. The Bank of England is expected to continue hiking for a fifth consecutive time. The voting count will be of interest, with the possibility of a rare three-way split. The recent Government announcement of the £15bn fiscal package is seen as delaying any slowdown in demand and keeping inflation elevated for longer.
This environment of central banks driving real interest rates higher will be bad for risk assets and stocks, and good for the dollar. The euro will also struggle while the ECB deliberates over its “fragmentation” tools to deal with the differing speeds of government bond yields in the Eurozone. As those in the region’s “periphery” rise ever higher above those in the “core”, crisis in the region gets closer, crimping any gains in the single currency from the more hawkish ECB.
Major risk events of the week
13 June 2022, Monday:
–UK GDP: Analysts forecast an increase in April GDP of 0.2% on the month. They say this is partly due to the apparent strength in retail spending and an increase in wider industrial production. But it seems almost inevitable a further slowdown will take place with signs of a retrenchment in spending in May.
14 June, Tuesday:
–UK Jobs: Consensus sees the unemployment rate holding below pre-pandemic levels at 3.7%. This is the lowest level since 1974. Total pay growth is picking up further as the labour market remains tight. This is one of the last pieces of data ahead of this week’s BoE meeting.
15 June 2022, Wednesday:
-US Retail Sales: The market median is for a print of 0.2% in May, down from the 0.9% in the previous month. Headline growth will be depressed by weaker auto sales. Inflation and higher rates are expected to affect consumers’ capacity to spend going forward.
-FOMC meeting: Money markets fully price in the second of three consecutive 50bp rate hikes at this meeting. The move takes the cash rate to 1.375%. The latest inflation data posted new cycle highs so the Fed’s profile for growth, inflation and rates will be of interest. Any hints on a bigger September hike will also be key.
16 June 2022, Thursday:
–SNB Meeting: Market pricing implies an 80% probability for a rate increase. The SNB has the lowest rates of any major central bank at -0.75%, a level that has prevailed since January 2015. Officials have opened the door to a hike in case of upside inflation surprises. That said, recent SNB forecasts predicted a return below 2% next year.
–Bank of England meeting: Analysts expect a fifth straight rate hike, with 28bps of tightening priced in. The vote is forecast to be split, with up to four MPC officials in favour of a bigger 50bp move. The recent government support package is expected to push out a decline in inflation. Markets see the terminal rate above 3% next summer.
17 June 2022, Friday:
-Bank of Japan Meeting: The BoJ is set to keep policy measures unchanged. Headline inflation is currently above the bank’s 2% target for the first time since late 2008. But this is largely driven by food and energy prices. The core remains subdued at 0.8% which means policymakers will keep easing.
-UK Retail Sales: April sales volumes surprised on the upside, led by food stores. A cutback in consumer spending is expected at some point with the cost-of-living pressures set to weigh on activity. Some sales may be taken up by entertaining at home.