Equities | Europe | FX | Global | Monetary Policy & Inflation
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
Canadian short-end yields increased most over the past week after the Bank of Canada (BoC) hiked by 50bps on Wednesday, taking their overnight rate to 1.5%. The move showed strong BoC willingness to fight inflation after April inflation printed a full percentage point above the BoC’s Q2 forecast. As a result, the CAD two-year OIS swap (+3.1 std-dev) priced in at least one extra hike over the next two years while at least 50bps is priced for the July meeting. Hike expectations across the $-Bloc and Scandinavia also followed the move higher.
European yields led the sell-off in rates with European Government Bond (EGB) yields shifting roughly parallel across the curves (+c.25bps in core and +c.35bp in BTPs) after last week’s May CPI overshoots. The European Central Bank (ECB) will need to show it is committed to fighting inflation. Henry thinks their hands are largely tied in terms of immediate action, so instead they may lean hawkish in tone at Thursday’s meeting. On the ECB outlook, he expects a confirmation of APP’s end this week and thinks they hike by at least 25bps in the July and September meetings. Read his ECB preview here. Elsewhere, US yields saw bear flattening beyond the five-year space, as non-farm payrolls (+390k) proved better than expected (+318k). Meanwhile, in a holiday-shortened week, Gilt weakness moved roughly matched core EGBs, albeit with underperformance in the two-year space.
Asia equities outperformed their Western counterparts. Notably, the Nikkei (+1.5 std-devs) moved closer to March highs while the CSI 300 (+1.1 std-devs) is up 10.1% from two-year lows. Optimism comes for the region as China reopens, while manufacturing PMIs proving more durable than markets had expected. In comparison, the S&P500 registered its eighth week of losses in the past nine, having returned +6.6% a week prior. The Euro Stoxx and FTSE-100 followed it lower. Amazon (+1.5 std-devs) proved the exception, with its stock split helping support the price.
The Week Ahead
Markets are betting on hawkish central banks. The Reserve Bank of Australia (RBA), Tuesday, comes before the ECB, Thursday. We expect the RBA to hike by 25bps tomorrow, and again in July, while we see a risk for 40bps at their August meeting. Since the last decision, when 25bps was made to be ‘business as usual’, no substantial data or comments have been released. A 25bp hike would likely prove disappointing to markets given that around half of analyst estimates in Bloomberg are looking for a larger move. Turning to the ECB, a more hawkish tone than expected could come in various forms, including leaving a 50bp hike on the table or more explicitly mapping out the path of policy after the exit from negative depo. We expect they will underdeliver market pricing over the next 12 months and see best value positioning for relative Federal Reserve (Fed) hawkishness. The end of APP should support higher steeper EGB curves, while the path out of negative depo and the steeper EUR curves should support outperformance for European banks. Finally, US CPI is out on Friday. The consensus forecast is 0.5% MoM, which Dominique sees as reasonable. She believes that continued MoM prints in a 0.4-0.5% range could see the Fed maintain 50bps until year-end. A surprise to the upside would likely help markets turn more hawkish on the Fed and use the USD as a safe haven. You can read Dominique and Henry’s views on the week ahead and see our weekly COVID trackers here.
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.