The key market this week was the bond market. A sharp sell-off gripped the gilt markets (UK bond market) post the high UK inflation print. Bunds (German bond market) followed suit as well and bond investors are starting to send signals that central banks may have to be more aggressive to deal with rising interest rates. This will be a key theme to watch going forward. Even though the FOMC minutes this week suggest the Fed will pause rates at some point in the future, stubborn inflation may force them to keep hiking. Watch for more aggressive expectations on central bank rate hikes to potentially pressure stocks next week.

Other key events from the past week

• GBP: Key Inflation Data, Aug 17: UK inflation hit double digits for the first time in 40 years. This increases stagflationary risks for the UK after the BoE brought forward recession projections into 2022 Q4 and should weaken the GBP.
• USD: FOMC Minutes, Aug 17: The key line on rate hikes was that, ‘at some point in time it would be appropriate to slow the pace of increase’. However, stubborn inflation may not allow that and that was what bond traders feared this week after high UK inflation data and hawkish comments from the ECB.
• NZD: Hawkish Tilt! Aug 17: The RBNZ took a hawkish tilt this week as the central bank raises its projections. The terminal interest rate has now been increased to 4.1% for December 2023 (up from 3.95% prior). Watch AUDNZD.

Key events for the coming week

• USD: Jackson Hole Symposium, Aug 25: Next week traders will be carefully looking for hints from the symposium over the terminal US rate and the meaning of the Fed’s new ‘meeting by meeting’ stance. Expect USD volatility.
• Still time to sell a possible bear market rally? The Dow Jones has a weak seasonal period ahead.
• USD: US inflation in focus, Aug 26: Traders will look carefully at the US PCE data for any confirmation that the US is passed peak inflation. If the Core PCE reading comes in below 4% that should take a little pressure off the Fed to hike rates. It could send the USDJPY lower in line with US10-year yields.

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