Equities | Europe | FX | Global | Monetary Policy & Inflation
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
Last week saw a generic sell-off across DM rates, led by the short-end. This was driven by a strong upside surprise to US inflation, and hawkish surprises from the ECB and RBA. Curves bear-flattened, and EGBs saw strong widening pressures, with BTPs the clear underperformer following the lack of perceived substance behind the ECB’s ‘anti-fragmentation’ tool.
Credit, too, saw strong underperformance, with CDS spreads gapping out to levels not seen since May 2020 (North American CDX HY through 560bp, European ITRAXX XOVER through 530bp).
Equity weakness resumes. European equities were down 7% on the week, led by Banks, Real Estate, Technology and Travel & Leisure (all -10%). Meanwhile, the S&P was down 8%, led by Consumer Discretionary. On a vol-adjusted basis, the worst performing indices were SPX and BOVESPA.
USD gains from flight-to-quality flows. JPY was the worst performer of the week, adjusted for volatility, following the BoJ’s reaffirmed commitment to ultra-loose monetary policy. With the ECB now shifted towards hiking in earnest, the BoJ stands alone amongst the major DM central banks in keeping rates low. JPY briefly printed new highs above 134.
The Week Ahead
Markets continue to bet on very hawkish outturns from DM central banks. The BoE and Fed will update their policy this week. For the Fed we expect them to follow through with their well-telegraphed 50bp hike (it will likely be the same in July, too). We will be watching closely the dispersion of the dots – particularly that of the year-ahead FFR, which is the widest ever. Dominique anticipates the end-2022 core PCE being lifted by around 25bp, while the end-2023 should remain near 2.6%. Given where the market is pricing following last week’s CPI, the risk is skewed towards a re-steepening in US curves.
The BoE will meanwhile likely deliver a fifth consecutive 25bp hike, with the potential for more hawkish comments after the recent fiscal package, and the growing evidence of public dissatisfaction with high inflation. A re-pricing of a more hawkish BoE is possible. We will be watching closely for guidance on the path of QT (currently slated for August).
For the ECB, we are watching the surveys for signs that economic sentiment is slipping (to hike 50bp in September will require a demand-driven deterioration of the inflation outlook. This week sees the ZEW, which is generally less informative. Still, a miss there could drive some reaction. Meanwhile, given how far periphery spreads have widened, we are cautious that the more dovish ECB speakers may seek to steer spreads back down with their rhetoric. Until that happens, the week’s EGB supply will add to widening pressures, with Italy, Spain and France all adding decent duration.
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.