Weekly Market Outlook – Central bank meetings will be the center of attention as all US Fed, Bank of England, Swiss National Bank and Bank of Japan meet this week. A rate hike is expected from both the Fed and BoE, while the BoJ and SNB stick to their loose monetary stance for longer.
On the data front, US retail sales, industrial production and PPI data will be watched closely as deflation fears are still on the upside. Meanwhile, China will be releasing its retail sales and industrial output data. The UK will be publishing April GDP and labor figures.
FOMC Meeting – Another 50 bp Hike
Following the strong US CPI released last week, the FOMC meeting will be the main highlight for the USD this week. Market consensus favors a 50 bp, according to the FedWatch tool.
The Federal Reserve concludes its two-day meeting on Wednesday.
Skyrocketing inflation pushed the market to anticipate a faster pace of futures hikes, pricing in a 75 bp hike in July, followed by 50 bp move in each of September and November.
Annual inflation unexpectedly hit 8.6% in May, the highest since 1981 and higher than market forecasts of 8.3%. Energy prices were the largest contributor with a 34.6% rise, the biggest since September 2005, while gasoline rose 48.7%.
On the other hand, rising concerns over persistent high inflation and the impact of high rates on growth still weighs on the outlook. Recent US PMI data showed slowing business activity amid softer demand and rising prices.
The stock market has seen much volatility on investors’ fear that inflation may not be peaking anytime soon and a recession may be imminent if the Fed continues its aggressive rate hikes. Investors are keeping an eye on the bond market, which is sending warning signals that the economy could be weakening.
The main catalyst for the markets will be the committee’s views on future hikes as well as updated economic forecasts. The Federal Reserve will release its updated quarterly dot plot along with the policy statement. Comments from Fed Chair, Jerome Powell, will be closely watched for clues on the policy path.
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BoE – More Hikes to Ease Inflation
The Bank of England is widely expected to take another cautious 25 bp hike amid fears of the economy slipping into recession, bringing UK rates to 1.25%. The swap market is pricing in the possibility of a 50 bp rate hike.
The bank has raised interest rates for four consecutive meetings in May to the highest since 2005, as inflation soared sharply and resulted in a material deterioration in UK growth outlook. Inflation is expected to rise further by the end of this year, to peak at nearly 10%.
Unlike the Fed, policy tightening outlook for the BoE is less clear-cut. While inflation is currently at a multi-decade high, UK growth is shaky, and there’s a greater risk that higher rates and tighter policy could spark a recession in the UK compared to the US.
SNB and BoJ to Stand Pat
Neither bank is expected to let go of its stimulatory policy in the foreseeable future. The Bank of Japan is expected to keep its rate at -0.10%. The Japanese Yen has reached a two-decade low against the USD, driven by yield differentials. As virus restrictions were gradually eased, the national economy had recently shown some fresh signs of growth catching up with other developed world economies. Despite that no rate increase is expected. The BoJ governor, Kuroda, is anticipated to renew the bank’s commitment to keep the capping of the 10-year yield at 0.25%. amid high inflation and sharply rising bond yields in the US and Europe.
The SNB is also seen holding up to its easing bias, keeping rates in the negative territory at -0.75% for another meeting. The recent reversal of the Swiss Franc to the downside makes room for the bank to stand pat. However, the bank is expected to reaffirm its pledge to interfere against any overvaluation of the Franc.
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