Fed chair Powell fully embraces the idea of policy front loading at that same IMF meeting yesterday

Markets

Yesterday was all about central bank talk. ECB council members Wunsch and vice-governor de Guindos kicked off with some hawkish comments, accompanied later by rumours that several ECB officials will bring a 50 bps rate hike to the table. President Lagarde at the IMF spring meeting pointed at the June meeting as the moment to decide on the next steps. The German curve underwent an impressive bear flattening with yields rising 7.1 bps (30y) to 15 bps (2y). The common currency also received a boost. EUR/USD swung to an intraday high of 1.0936 but ended marginally lower (1.0834). That was not because of the euro suddenly weakening but due to a dollar comeback. Fed chair Powell fully embraced the idea of policy front loading at that same IMF meeting yesterday. US yields caught up, rising 10-11.3 bps at the front-to-middle end of the curve. Money markets now fully discount 50 bps hikes for the next two meetings with speculation for a third building (>70% chance priced in). Rates in the UK spiked as well, adding almost 18 bps in the 2y. This followed comments from BoE’s Mann, usually on the dovish side of the spectrum, citing evidence of high inflation filtering into company pricing strategies. She is contemplating the idea of bigger rate moves. For governor Bailey, the labour market is the central piece. The real income shock will slow growth he said, but question is wether the labour market, and by extension wage growth, will follow. EUR/GBP followed EUR/USD in retreating from intraday highs on sterling strength. The pair closed slightly higher at 0.832.

All of that hawkish speech was destined to have repercussions for risky assets. Wall Street fell more than 2% (Nasdaq) and mood on Asian stock markets is sour as well. Japan and Australia underperform (-1.5%). Europe ended off intraday highs but still in the green yesterday. Futures this morning, however, suggest opening losses of 1.7%. The euro is still well bid overall but keeps a tight sideways trading range vs the USD. The Japanese yen is strengthening slightly following a TBS report that US and Japanese Finance Ministers Yellen and Suzuki discussed a joint currency intervention. USD/JPY eases to a still-high 128.17. After having heard from the big three (US, UK, EMU) Bank of Canada governor Macklem felt he couldn’t stay behind (see headline below).

A whole series of PMI business confidence indicators were/are due today; ranging from Japan over Europe and the UK to the US. Consensus expects them to stabilize at solid (EMU) to strong (UK, US) levels. The Ukraine war last month didn’t affect headline readings that much but it did crush expectations for the year ahead to levels seen in the wake of the pandemic outbreak. Let’s see how much of that was an overreaction. Today’s speech by Lagarde at the Peterson Institute for International Economics will be closely watched too. She is switching places with BoE’s Bailey, who now takes place in the IMF panel to discuss inflation dynamics after having talked at PIIE yesterday. Several ECB members gave the perfect assist over the previous days. Up to Lagarde to finish it today with a goal. But even in case she’d miss, we don’t think European/core bond yields are up for a heavy correction, not even before the weekend where we’ll find out who the next French president is going to be. There’s too much momentum going on.

News headlines

In line with global price trends, Japan’s March inflation continued its uptrend in March. Even so, inflationary pressures in Japan remain modest compared to developments in other (industrialized) countries. The closely watched core CPI measure (excluding fresh food) rose from 0.6% M/M tot 0.8% Y/Y, the fastest pace in 2 years. The headline measure even accelerated to 1.2% Y/Y, a level last seen at the end of 2018. (Core) inflation is expected the ‘accelerate’ substantially further in April as a cut in telecom prices last year will drop out of the Y/Y-comparison and might even cause inflation to reach/surpass the 2.0% threshold. The BoJ meets on Thursday next week.

The Bank of Canada ponders the idea of frontloading monetary policy tightening even harder. BoC governor Tiff Macklem indicated that the BoC is considering the option of a larger rate increase than the 50 bps hike it executed last week when it brought the policy rate to 1.0%. The comments come after Canada March inflation earlier this week was reported at a much faster than expected 6.7% Y/Y. “We're prepared to be as forceful as needed and I'm really going to let those words speak for themselves.”, Governor Macklem was quoted. The Canadian dollar hardly profits from the comments this morning and holds near USD/CAD 1.26 as the hawkish rhetoric from the BoC governor was counterbalanced by a similar ‘frontloading’ approach from the US Fed (cf supra).

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