Rising funding costs

View from the Trading Desk:

Rising funding costs

Government bond yields continue to climb in response to higher central bank rate expectations while consumer confidence and spending are falling in response to shrinking disposable incomes. Purchasing Managers' Index data, which typically signals a decline in economic conditions have remained relatively buoyant, but market volatility is on the rise.  

Yesterday, a mistake on the Citibank trading desk in London triggered a crash in EU equities and—according to Bloomberg—wiped out 300bn EUR at one point. The details of the episode are unclear at this time, but what appears evident is that despite the equity sell-off over the past weeks, markets are still very apprehensive about asset prices in the context of rising interest rates.

Bottom line: The below is a table of one-week changes in two-year Government Bond Yields and the amount of additional quarter-percent hikes they represent. (Please note, Australia raised its interest rate overnight by 0.35%, an additional 10bps than forecast, skewing this result). This is not predicting rate hikes—the actual formula is rather more complex—rather it provides context for the scope of the ongoing bond sell-off and potentially for a further equity sell-off as the cost of funding climbs.

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Data sourced from Bloomberg.

The week ahead
 

GBP 

Sterling has had another turbulent week falling 2% against the US Dollar to fresh multi-year lows while attempting to push higher against the Euro and Scandinavian currencies. Markets will be closely watching developments out of the Bank of England this Thursday which could see interest rates hit 1%, the highest level in 13 years. BoE Deputy Governor Jon Cunliffe voted for no change in interest rates in the March meeting, a greater dissent from the 25 basis-point expectation in the May meeting could spell further trouble for Sterling with markets pricing another 1.25% in hikes still to come. Stagflation is looking more probable as the early signs of a spending slowdown begin to filter through in the latest retail sales and order expectations data from manufacturers as inflation continues to dominate sentiment. 

  • The British Retail Consortium (BRC) Shop Price Index y/y will be released on Wednesday with the previous reading currently standing at 2.1%. 
  • The Bank of England will provide its latest interest rate decision this Thursday along with the Monetary Policy Report. 
  • House prices look set to continue rising with the Halifax House Price Index m/m expected to climb 0.7% in April. 
  • Monetary Policy Committee members Catherine Mann, Huw Pill, and Silvana Tenreyro are due to speak on Friday throughout the day.

 

EUR

The Euro has continued to weaken against most other G10 currencies over the last week as US Dollar strength pushed EUR/USD 2.50% lower, taking its year-to-date losses to almost 7%. The common currency has been suffering from monetary policy divergence between the dovish European Central Bank and hawkish Federal Reserve in the US over recent months. Consensus for greater hawkish policy action is building at the ECB with Governing Council member Robert Holzmann expecting two rate hikes by the end of this year with the deposit rate rising to 1.5% next year. European yields have pushed higher with the German 10-year bund hitting 1% this morning, its highest level since 2015. Italy has introduced a €14bn support package for families in response to the energy crisis funded by excess taxation on energy companies resulting from the commodity rally.   

  • The Economic and Financial Affairs Council (ECOFIN) and Eurogroup are scheduled to meet throughout today. 
  • Spanish Unemployment levels are expected to rise by 2.0K in April, partially reversing the 2.9K decline in March. 
  • Eurozone Retail Sales m/m will be released on Wednesday for the month of March with consensus pointing to a 0.2% contraction versus a 0.3% expansion in February. 
  • On Friday, German Industrial Production m/m for March will be published, analysts are expecting a -1.3% print for March versus 0.2% in February. 

 

USD

It’s been 20 years since the US Dollar Index hit the heights of 103.93 as markets turn ultra-hawkish on the Federal Reserve’s current monetary policy path. Such a hawkish rhetoric has sent the Japanese Yen tumbling over the last year with USD/JPY up nearly 20% as the Bank of Japan continues to brush off its dovish policy stance. A 50 basis-point hike has been priced in by markets for this Wednesday’s Fed meeting with some more details around the schedule for the run-off of the central bank’s $9tn balance sheet expected. US yields continued to move higher on Monday as the US 10-year Treasury hit 3% amid a gloomy growth backdrop and soaring inflation. US futures are pointing lower today. 

  • ADP Non-Farm Employment Change for April will be released on Wednesday. Analysts are expecting a 382K print versus 455K in March.
  • The latest ISM Services PMI print is scheduled for release on Wednesday as expansionary conditions are predicted to remain with a 58.5 reading forecast for the industry.   
  • Federal Reserve policymakers will be meeting on Wednesday with markets anticipating a 50 basis-point interest rate increase from the central bank.
  • Non-Farm Payrolls will close out a relatively hectic week for US economic data. Current forecasts are for a 390K print in April with the Unemployment Rate set to fall by 10 basis points to 3.5% in the same month.  

 

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