Markets to Watch This Week: Fade Hawkish July ECB Pricing

We standardise price changes across different markets to allow for cross-market comparisons.

Market Moves

USD/CNH rejects 7.00 as USD pulled back from decade highs. Markets have begun to look past the expected poor April China data and have instead turned more optimistic; AUD befitted on the back of this (+1.0 std-dev). Shanghai has started to reopen with the majority of ‘whitelisted’ companies having resumed operation in the municipality while four metro lines and one bus route returned to service on Sunday. At the same time, Beijing has seen its high-risk areas reduce to 11 from 18 a week earlier despite daily cases having returned above 50. Meanwhile, USD pared some of its recent strength. GBP benefited most over the past week (+1.9 standard-deviations), while Bert and Caroline see BRL (+1.8 std-dev) and CLP as the best LatAm longs.

2Y and 10Y Gilts sold off with the curve bear-flattening as greater tightening was priced into the short-end following strong CPI and RPI outturns. Data this week includes public sector finance numbers, as well as PMIs. A weakening economic outlook would reduce hike pricing in the short-end, although thus far most weakness has been concentrated in the consumer space. Meanwhile, the US ten-year found strength to pull back from 3.0% in line with a decline in market inflation expectations (-1.6 std-dev) ahead of an expectation for the Fed minutes to be hawkish. Read Dominique’s expectations here. Sweden two-year OIS swaps moved higher (+1.1 std-dev), with markets pricing 50bps for the 30 June meeting. The yields pulled more than a standard deviation on AUD 10Y and NZD 10Y OIS swaps. We expect the RBA will hike by 25bps at the June and July while there are risks of 40bps in August, there’s little to watch from data this week; retail sales are expected to climb 1.0% MoM for April. Meanwhile, the RBNZ are expected to hike by 50bps on Wednesday, though has been consensus for some time. Future uncertainty lies in whether the July meeting will follow with 50bps. A higher neutral nominal OCR (last estimated at 2%) would likely see pricing move towards 50bps for July.

US equities continued to sell off, with Apple, Tesla and Alphabet all dropping close to 2sd on the week, leading the S&P500 into bear market territory. We remain bearish equities (see here for John Tierney’s ETF biases). Meanwhile, EM equities pared recent losses. NIFTY (India) and Hang Seng were up +3.1% and +4.1% respectively over the past week.

The Week Ahead

This week, focus turns to Fed minutes and a deluge of speakers from the ECB and BoE. Dominique expects the Fed minutes to be hawkish and that the next big item on the Fed agenda could be the outright sales of MBS. Since the Fed likes to pre-announce its policy changes well ahead of time, she will be looking for initial hints in the minutes. In Europe, it’s a busy week for ECB speakers with voices from across the dove/hawk spectrum. Henry thinks moves to price above 25bps for the July meeting should probably be faded given that the proposition is very far from consensus across the ECB Governing Council, while pricing for hikes across the next 12 months has already gone too far. Lastly, consensus expects 50bps from RBNZ on Wednesday, uncertainty lies around whether July will follow with 50bps. 25bps likely is a base case for July, though the hurdle to 50bps is low. You can read Dominique’s and Henry’s views on the week ahead and see our weekly COVID trackers here. While you can also watch Dominique and Andrew discuss markets this week here.