Rapid tightening on the way - the week ahead

TonOanda

Oanda Representative
Messages
1
Central banks playing catchup

There has been incredible resilience in equity markets in recent weeks as central banks have ramped up interest rate expectations, particularly at the Fed, and bond markets have at times priced in a recession. While there have been wobbles in stock markets, they’ve quickly recovered which suggests investors may not be buying the recession warnings.

Of course, all recessions aren’t equal and it’s possible that much lower growth in the near term is already priced in as a result of the multiple headwinds facing the economy. A mild recession probably wouldn’t drastically change anything as far as markets are concerned. Especially if central banks succeed in getting inflation under control again.

Considering their collective record over the last six months or so, there isn’t a huge amount of faith in central banks to fix the mess that is at least partly of their own doing. Perhaps they’ll surprise us all but that will probably mean some big rate hikes over the coming months as they hope to make up for lost time.



US

Right now the most important economic data release for the Fed is inflation data. Wall Street is buying the Fed’s hawkish turn and is pricing in rate hikes at every policy meeting for the rest of the year, with the next two policy decisions delivering super-sized rate hikes of 50-basis points. The latest inflation report is expected to show pricing pressures are intensifying, with the March reading showing an 8.4% gain from a year ago.

Inflation is widely expected to make a fresh four-decade high and that should justify expectations for a 50-basis rate hike at the May 4th FOMC policy meeting and the start of the balance sheet reduction. Other notable economic releases occur on Thursday and include retail sales and preliminary University of Michigan consumer sentiment reading. On Friday, the Empire manufacturing survey and industrial production data will be released.

It will be another week full of Fed speak, with Bostic, Bowman, Waller, and Evans speaking on Monday, before the latest inflation report. Brainard will be the first to speak after the release on Tuesday, while Barkin will speak later that night. Mester and Harker will both speak separately on Thursday.

EU

The Ukraine invasion continues to dominate the outlook as far as Europe is concerned, with sanctions imposed coming at a greater cost than those from elsewhere, due to the closer trade ties. And with the low hanging fruit picked, further sanctions will be very damaging unless phased in over a long period of time which to a great extent undermines their impact.

The ECB meeting next week won’t see interest rates rising, as we’re seeing elsewhere, but we could see the tone shifting as the central bank comes to terms with much higher levels of inflation. The ECB became much more hawkish in March but if markets are to be believed, and they’ve very much have with other central banks over the last six months, there’s a lot further to go. We could get an indication that they’re heading that way next week although they may save any big announcements for June when they have fresh economic projections.

The French presidential election kicks off this weekend and the race between Emmanuel Macron and Marine Le Pen has become much closer in recent weeks. Once seen as unelectable, Le Pen is now a serious contender and the two are expected to progress to the second round, at which point some have the vote falling within the margin of error, meaning a victory is not assured for Macron. Many are pointing to Brexit and Trump as evidence that the once seemingly impossible can become very possible and Le Pen could be the next to be added to that list which may make some in Brussels very nervous. A strong showing this weekend could make traders nervous on the open next week.

UK

A shortened week for the UK but we still get the usual data dump with GDP on Monday, jobs report on Tuesday and CPI inflation Wednesday. It’s obvious which is most important in the current environment, with the CPI data potentially telling us whether the BoE is correct to be already cooling its tightening talk. Considering how this has gone so far, I expect the data won’t make for good reading for the MPC.

Russia

Russia is facing the steepest recession since the fall of the Soviet Union but currency controls have worked in stabilising the rouble which enabled the CBR to cut rates by 3% on Friday. The Key Rate now stands at 17% and they warned it could be cut further which didn’t trouble the currency.

Further sanctions have been imposed but those that will really hurt continue to face resistance. No major economic events next week.

Read more and check the full economic calendar: https://www.marketpulse.com/20220408/week-ahead-rapid-tightening-on-the-way/

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.
 
Top