The big story gripping markets this week was the huge sell-off in the bond markets. Bond yields have kept tracking higher and higher since the 8.6% y/y inflation print from the US last Friday. Investors are seeing that the surge in inflation will have to be met by a huge rise in interest rates from central banks, even if that brings economies into a recession. Jerome Powell is not sure he can manage a ‘soft landing’ (the ability to raise interest rates without sending the US into a recession) as it depends on factors outside of the fed’s control. One thing from this week is that it is still too early to call ‘peak inflation’. The SNB demonstrated this with a surprise rate move as they seek to bring down Swiss inflation.
Other key events from the past week
- Fed: Interest rate decision, June 15: STIR markets were pricing in a 96% chance of a 75bps rate hike and the Fed delivered a 75bps hike in line with expectations as they signal they are getting tough on inflation. The reaction was mild, but investors realise that there could be even more rate US hikes to come.
- BoE: Interest rate decision, June 16: The BoE conducted another 25bps rate hike this week, but indicated that the market is still overestimating how far interest rates will have to rise. This should keep pressure on the GBP for now.
- SNB: Interest rate decision, June 16: The SNB surprised both economists and STIR markets with a 50bps rate hike as they show the world they are getting tough on inflation. Will the EURCHF now fall to parity this month?
Key events for the coming week
- CAD: Inflation print, June 22: Expectations from STIR markets are now for a 75 bps rate hike from the BoC on July 13. However, if inflation surprises to the downside that could prompt a sharp correction lower in the CAD, so CAD traders beware.
- Golden glow?: Time for upside? Gold seasonals are strong over the summer. Will they rise again this summer?
- JPY: Headline inflation, June 24: For years Japan has struggled with deflationary pressures, but now the last headline print came in at 2.5% y/y. Another high inflationary print and the JPY could gain on expectations of a coming BoJ rate hike. If they have not already hiked on Thursday, which is a risk now.