Equities | Europe | FX | Global | Monetary Policy & Inflation
Markets to Watch This Week: BoE and RBA to Hike 50bps, and Upside Surprise for NFP
- By Bilal Hafeez and Ben Ford
- 3 min read
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
Markets took the 75bps hike from the Fed as dovish, although Dominique disagreed. She thinks the market is mistaken on both the Fed reaction function and the direction of inflation. Global yields continued to fall, alongside a generic bid for assets on the perceived dovishness (Chart 2). Notably, commodities saw the largest risk-adjusted move over the past week (John expects them to remain volatile; Chart 3). US high-yield credit spreads also tightened, and the USD weakened, in particular against BRL.
Turning to the major themes over the past week, markets continued to think the Fed has done the lion’s share of the work on inflation. It was, no doubt, helped by a negative GDP print. However, Dominique sees growth returning positive in H2. This is one reason why we disagree with the market pricing for the Fed’s policy path. In fact, Dominique expects the Fed to hike another 175bps by end-2022. In Europe, inflation has yet to abate; with preliminary July CPI printing higher than expected. Meanwhile, economic confidence readings in the bloc continue to fall.
The Week Ahead
This week the focus shifts to the Bank of England on 4 August (Thursday). We’re looking for a move to 1.75% (+50bps), which is largely priced in. It reflects the tone of MPC policy makers’ recent comments, high inflation, and the need to get to the neutral rate. However, we’re not completely discounting a smaller move. Further out, in fact, we remain of the view that the market will be disappointed by the ultimate policy path. There will also be an update of the monetary policy report (MPR) and with it the BoE’s forecasts for major economic data. Henry is also expecting more information on the path for active gilt sales. He thinks that while Governor Andrew Bailey may not provide guidance around explicit quantities yet, they will ultimately come to lean on QT more than hiking to tighten policy. Please find Henry’s BoE preview.
In the US, despite being in a technical recession, Dominique is expecting Fed speakers to argue that the US is not in a recession. While, on data, employment numbers will be the focal point. Dominique expects NFP likely to be higher than the 250k expected by the consensus because trend growth is positive and real wages have been falling. If Dominique is right, it could mean markets begin to price out some of their dovish FOMC takeaway. There will also be updates to Canada (5 Aug) and New Zealand employment data (3 Aug).
Elsewhere in the G20, we expect the RBA to hike the cash rate to 1.85% (+50bps) on 2 August (Tuesday). This is because unemployment is at record lows (3.5%), wage growth is accelerating, inflation is moving towards Governor Lowe’s year-end forecast (7% YoY), and the economy continued to grow through Q2 (+0.8% QoQ). At the meeting, we will also get a first look at the RBA’s updated forecasts. These will be published in full on 6 August. Staying in Australia, there’ll also be updates to monthly housing data. Other key data releases this week include PMIs in Japan, China, Canada, and Australia as well as China’s current account and FX data. For more in-depth analysis, see Dominique and Henry’s week-ahead preview, and watch Andrew and Dominique discuss the week ahead.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.