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On the financial market side, the main developments continue to play out in the US Treasury market. The Fed is fully focused on containing inflation and signalling that the fastest policy tightening ever is on the way. U.S. fixed income is on sale across the board, and the benchmark 10-year Treasuries rose another 13 basis points to more than 2.83 last week.
The ECB's vague and non-committal communication after the April meeting did not provide any new information. The contrast in attitude between these two central banks puts pressure on the exchange rate of the common currency. Both Latin American currencies and the British pound managed to buck the general trend, but against the greenback, they ended the week flat or higher. Commodity prices continue to skyrocket. Equity markets are holding up remarkably well given the sharp rise in interest rates, which normally have a negative impact on stock prices.
We will hardly get any market-shattering data this week: apart from the PMI indicators for economic activity in the eurozone and the UK (Friday), there is not much on the agenda. However, markets will be alert to the statements of the world's leading central bankers, including Fed Chair Powell, who are participating in an IMF panel this week. Below are the major currencies in detail.
At its April meeting last week, the ECB did not take the opportunity to convince markets that it is serious about inflation. The announcements were mainly a repetition of those made at the previous meeting, despite the fact that all inflation indicators have deteriorated since then. However, 'sources within the ECB' have leaked that there is a strong dissent in the Governing Council and that an interest rate hike in July is still very possible. This week, the focus will not only be on the PMI indicators, but also on the second round of the French elections, which will be held this weekend. We expect Macron to be re-elected, as the polls predict, but we also think that markets have largely already priced this in and his victory will therefore have little effect on the euro.
In the UK, the March inflation report increases the pressure on the Bank of England to restore its credibility. The upside surprises in key sub-indicators have pushed inflation to another 30-year high, and it is almost certain that next month's figure will be even higher. Markets expect the Bank of England to be forced to tone down the dovish rhetoric. As a result, the British pound ended up at the top of the G10 weekly rankings. There are important appearances this week: Governors Mann and Bailey will participate in an IMF panel, both on Thursday. A hawkish undertone should be good for the pound, as should PMIs (Friday) pointing to continued economic growth.
Fixed income markets were able to catch their breath when the inflation report turned out to be slightly milder than expected, but that didn't last long. In the two days that followed, strong retail sales and producer price inflation, which was higher than expected, led to the realization that inflation is far from over and the Fed needs to work hard to get it back under control. U.S. bond yields continue to rise inexorably. This supports the dollar against European currencies, but much less against commodity currencies. This week, we will not only listen carefully to the statements of Federal Reserve representatives, but we will also be keeping a close eye on the US government bond auctions. In particular, the sale of $16 billion worth of 20-year bonds next Wednesday looms. Last week, the auctions did not go well. Now that the Federal Reserve is no longer buying government bonds, the U.S. may have to make more and more concessions to meet its immense financing needs.
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
