Post date: 19/04/2022 12:52
The key developments in financial markets continue to take place in the US Treasury market. The Fed is squarely focused on bringing inflation back under control and is telegraphing one of the fastest tightening processes in history. US fixed income is selling off across the board, and the key 10-year Treasury benchmark rose another 13 basis points to over 2.83% last week. The ECB’s vague and noncommittal communications at its April meeting added little information, and the contrast between the two central bank attitudes is pressuring the common currency lower. Latin American currencies and sterling both managed to buck the trend, however, ending the week flat to higher versus the greenback. Commodity prices continue to soar, and stock markets are holding up remarkably well considering the sharp rises in rates, which have usually been a negative for equities. Market moving data this week will be scarce. There won’t be too much on tap, aside from the key PMIs of business activity in the Eurozone and the UK on Friday. That said, there will be closely watched speeches from the world’s leading central bankers at an IMF panel this week, including Fed Chair Powell on Thursday.
Last week’s inflation report for March out of the UK piled further pressure on the Bank of England to try and restore its credibility. Upward surprises across the key subindices brought inflation to a fresh 30-year high, with a near certainty that next month’s print will be even higher. Markets are expecting the Bank of England to be forced to retreat on its dovish rhetoric, and sterling ended up at the top of G10 weekly rankings as a result. This week we have key speeches at the IMF panel by MPC members Mann and Bailey, both on Thursday. Any hawkish overtones should be positive for sterling, as should be the continued expansionary strength we should see in the PMIs of business activity on Friday.
The ECB passed on the chance to convince markets that it is taking inflation seriously at its April meeting last week. The communications were largely a reiteration of those in the previous meeting, in spite of the turn for the worse in all inflationary gauges since then. However, there seems to be significant dissent within the council, as “ECB sources” leaked that a July hike in rates is still very much a possibility. In addition to this week’s PMI data, focus will be on the second round of the French election this weekend. We expect Macron to win re-election as all polls predict, but also think that this is largely priced in by markets and will have little impact on the euro.
The relief in fixed income markets from a slightly softer-than-expected inflation report was short lived. Over the next two days, strong retail sales and higher-than-expected producer price inflation brought the realisation that this inflationary episode still has legs and the Fed has a lot of work ahead to bring it back under control. US rates continue to march inexorably higher, which is helping the US dollar against European currencies, though not so much against commodity ones. In addition to speeches by Federal Reserve officials, we will be paying close attention to US government auctions of Treasuries this week. The sale of $16 billion worth of 20-year bonds on Wednesday looms especially large. Last week’s auctions did not go well, and the US may have to make increasing concessions to secure its enormous borrowing requirements now that the Federal Reserve is no longer buying any Treasuries.