Defying gravity

Over the past several weeks, central banks have strived to bridge the rate-expectation gap with markets that anticipated much higher rates over the next year to combat inflation. The impact is that US Treasuries (since the Federal Reserve tends to lead monetary policy changes) are getting trounced and the yield curve continues to move higher:

A comparison of the US Treasury curve today, one week ago, two weeks ago, and one month ago


Source: Bloomberg

For a long time, we've maintained that a rise in rates will do little to alleviate imported or supply-constrained drivers of inflation. But given that headline inflation levels are above 7%, and unemployment has reached pre-Covid lows of circa 4%, the Fed has little choice but to drive rates higher.

US CPI and US PCE (Personal Consumption Expenditure), the Fed's preferred measure of inflation


Source: Bloomberg

Bottom line: The most perplexing thing is that equities have not felt the pain of higher financing costs and required rates of return. Some market pundits speculate that this might be attributable to optimism over the Ukrainian conflict, or perhaps a lack of credible alternatives, but it's looking a bit dicey in valuations once again. The question really is whether this sort of progression is sustainable, or whether equities are having a Road-Runner moment.


Source: Bloomberg

 

The week ahead
 

GBP 

Sterling put in a relatively mixed performance against the rest of the G10 currencies last week, as diverging monetary policies and commodity prices continue to drive valuations. The Pound gained another 2.50% on the Japanese Yen while finishing flat against the US Dollar. Meanwhile, the Bank of England is feeling the pressure of a tight labour market as post-Brexit financial rules increase the need for a larger staff pool. Regarding monetary policy, the dovish tilt in the most recent meeting could provide scope for a breather when it comes to tightening, until after the next meeting in May, as inflation peaks and more certainty regarding the growth outlook is acquired.        

  • UK Mortgage Approvals are expected to read 75K in February, up from the 74K print in January. 
  • The British Retail Consortium (BRC) Shop Price Index y/y will be published on Wednesday, with the prior release reading 1.8%. 
  • Monetary Policy Committee member Ben Broadbent will speak at the National Institute of Economic Research on Wednesday at 9:10AM. 
  • The Nationwide House Price Index m/m will be published on Thursday, with analysts expecting a 0.5% print. 

 

EUR

EUR/USD fell another 50 basis points last week as the Russia-Ukraine conflict continues to cap any upside in the common currency. European Central Bank President Christine Lagarde has claimed that some Russians are circumventing sanctions by utilising Cryptocurrency assets as volumes of Russian Rubles to Cryptos reach their highest levels since 2021. Markets have started to price in greater tightening from the ECB; four 25 basis-point rate hikes are now priced in for the rest of 2022, which would take the deposit rate to 0.50%. European bonds have sold off as a result, with the German 10-year bond hitting a 0.60% yield this morning. 

  • German Gfk Consumer Climate will be published tomorrow and is expected to read -14.6. 
  • Preliminary CPI m/m for Germany is due for release on Wednesday; forecasts suggest a 1.3% reading for March. 
  • For February, German Retail Sales m/m are forecast to come in at 0.5% and will be published this Thursday. 
  • Eurozone flash CPI and Core CPI y/y for March is projected to hit 6.7% and 3.1%, respectively, and is due for release on Friday. 

 

USD

The Buck was in favour last week as the US Dollar Index gained almost 0.60% following a slowdown in risk-on momentum. As markets continue to price in a hawkish Federal Reserve, bond yields continue to climb in the US. Analysts at Northern Trust Asset Management believe the Fed is now willing to sacrifice growth in favour of taming inflation with the possibility of a 50 basis-point rate hike in the near future. The US has also warned those aiding Russia to try and evade sanctions will be punished as concerns grow over potential evasion. US stock market futures are relatively flat today, with the Nasdaq pointing ten basis points lower.  

  • US JOLTS Job Openings are forecast to print at 11.00M in February versus 11.26M in January. 
  • ADP Non-Farm Employment Change is due for release on Wednesday; analysts expect a 455K print for March. 
  • The Core PCE Price Index m/m is projected to read 0.4% for February and will be released this Thursday.
  • Finally, to end the week, Non-Farm Payrolls are expected at 485K for March, while the Unemployment Rate is estimated to have fallen to 3.7%. 

 

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