Weekly Market Outlook

Weekly Market Outlook: BoC, ECB, RBNZ Meetings and US Inflation in The Spotlight

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Weekly Market Outlook – Despite the quiet opening and closing, this week is data-packed as investors await policy meetings in the Eurozone, Canada and New Zealand. While the first is expected to take no policy actions, the latter two are widely expected to hike rates for the second consecutive meeting to keep inflationary pressures under control. Meanwhile, USD investors will assess CPI inflation and retail sales numbers to see how fast the FED will tighten its monetary policy this year.

USD – Hot Inflation Urges for Rapid Tightening  

It will be a busy week for the greenback as the earnings season kick-off and more key economic releases will provide further clues on how the economic recovery and inflationary pressures are evolving. In the meantime, speeches from Fed officials this week will be followed carefully for more details on what the Federal Reserve plans for the next FOMC meeting. Market participants are pricing in a 50 bp rate hike in May.

FOMC members voted to increase the fed funds rate by 25bp in its March meeting and officials are expecting additional six hikes this year to peak at 2.8% in 2023. Fed members noted the economic uncertainty in the wake of rising geopolitical tensions. However, that is not expected to hinder shrinking the Fed balance this summer. 

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Another driver for the USD this week will be the quarterly earnings release from major financial entities including JPMorgan, Citigroup, Wells Fargo, Morgan Stanley and Goldman Sachs. On Tuesday, CPI inflation numbers are expected to confirm the persistence of inflationary pressures. Annual inflation is forecasted to reach 8.5% in March, the highest since early 80s, due to high energy prices, supply constraints and strong demand. March retail sales will also reflect stronger demand by the US consumers.

NZD – More Rate Hikes to Stop Surging Inflation

The RBNZ is expected to raise interest rates for the second meeting in a row to a pre-pandemic level of 1.25%. on Wednesday. The central bank is set to hike rates more aggressively this year than previously thought in order to control the rapidly-rising inflation. A 50-bps hike may signal more tightening to come and may keep NZD steady for more gains.

Annual inflation rate jumped over a three-decade high at 5.9% in the fourth quarter of 2021 and is poised for more increases as the economy reopens after the continued lockdown in the main cities for most of the last year.

CAD – Another Rate Hike

Similarly, The Bank of Canada is expected to raise interest rates for a second straight meeting, only this time it will be a 50 bp hike.

Recent spikes in oil prices after the Russian-Ukrainian crisis are expected to boost the domestic economy, stimulate sector’s investments and pose upward pressures on the Canadian Dollar.  In this regard, expectations refer to 6 rate hikes in 2022, followed by probably 3 more in 2023. The bank’s communication will reveal clearer insights on the policy path this year. 

Weekly Market Outlook - CAD CPI Inflation
Source: Statistics Canada

In its March meeting, the bank decided to raise rates 25 bp to 0.50% stating the very strong economic growth in the fourth quarter of last year at 6.7%. Both exports and imports have picked up and CPI inflation remains well above the Bank’s target range. As inflationary pressures become more pervasive and measures of core inflation have all risen, inflation is now expected to be higher in the near term than previously projected. “Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards.” The BoC stated.

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EUR – A Possible Policy Shift?

The European Central Bank will conclude its monetary policy meeting on Thursday, but no changes are expected regarding interest rates for the time being. ECB officials are closely watching further developments in the Russian-Ukrainian war despite the elevated inflation levels.

However, EUR investors will look closely for some clarity on the timeline of the rate hike cycle after the ECB’s March meeting minutes came in a more hawkish tone than anticipated. Surprisingly, policymakers have signaled plans to end the asset purchase programme in Q3 while an immediate policy normalization has been supported by many members.

The upcoming meeting is anticipated to reveal if the ECB board is shifting toward a policy normalization as inflation rate is more than 3 times above the ECB target of 2%. Eurozone annual inflation hit 7.5% in March, printing a new record high for the 4th straight month.

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