Please see the latest Weekly Market Commentary from Brooks Macdonald received yesterday evening:
- A hawkish European Central Bank (ECB) statement and a US Consumer Price Index (CPI) beat drove equities and bonds lower last week
- Persistent inflation pressures in the US have added to speculation that the Federal Reserve (Fed) may add 75bp hikes to its toolkit
- This week sees the Federal Reserve, Bank of Japan and Bank of England issue their latest policy guidance
A hawkish ECB statement and a US CPI beat drove equities and bonds lower last week
After the hawkish messaging from the ECB on Thursday, markets entered the US CPI print on Friday with little momentum. The US CPI print, which came in above expectations, drove equity sentiment lower and the risk-off tone continues as European and Asian markets start the new week. Central banks will remain in focus this week with the US Fed, Bank of Japan and Bank of England (BoE) all due to update their policy stance.
On a headline basis, US CPI was expected to come in at 8.3% however after a large monthly surge, the year-on-year reading actually moved to 8.6%. The core reading also came ahead of market expectations, recording a 6% year-on-year gain versus 5.9% expected. The year-on-year core number does represent a decline from April’s figure (6.2%) however the market was perturbed by the surge in headline CPI in May. This added further fuel to the bond market sell-off, with 10-year US Treasury yields now trading over 3.25%. Friday’s US CPI beat has added to speculation that the Fed may start to look at 75bp rate hikes to tackle the inflation backdrop.
Persistent inflation pressures in the US have added to speculation that the Fed may add 75bp hikes to its toolkit
The Federal Reserve has guided the market towards expecting another 50bp rate hike at this week’s meeting however the possibility of a 75bp rate hike may now be on the table for the July meeting given the CPI print last week. The Fed, like all market participants, are reacting to the inflation prints as they are released, of more difficulty for the Fed however is that they need to guide the market as to the upcoming expected path of policy which remains heavily clouded by demand and supply side factors. The Bank of England is also expected to raise interest rates this week but by a smaller 25bp increment. The Bank of England has struck a more balanced tone than the Fed, worried that interest rate hikes could disproportionately impact the UK economy. With global inflation fears ignited once again, the BoE will need to choose between prioritising inflation or the economy.
This week sees the Federal Reserve, Bank of Japan and Bank of England issue their latest policy guidance
With central banks looking to set policy not only immediately, but also guide towards future decisions, the importance of individual data points is increased. Last Friday’s CPI print will clearly feed into Wednesday’s decision but it will also inform the Fed’s broader statement over what the bond market can expect over the coming quarters. Such guidance may be misplaced given the highly uncertain backdrop, however markets have fallen sharply as investors prepare for another step up in the hawkish narrative from the US central bank.
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Andrew Lloyd DipPFS
14/06/2022