9.3
8.524 reviews
English
EN
Inflation continues to spike globally. Expectations and historical correlations remain intact. The carnage in global bond markets intensified last week, with 10-year Treasury yields approaching the psychological level of 2.5%, and immediately surpassing this week. Global equity markets, on the other hand, have held up well, as investors keen to buy assets to have some protection against soaring prices.
Emerging markets in particular are benefiting from this trend, as the prices and scarcity value of the commodities they export continue to rise. The Brazilian real – which has been our favourite for quite some time – deserves an honourable mention, with a meteoric rise of 5% last week and a staggering 18% so far this year. The yen again fared the worst. There is a widening gap between the 'dovish' Bank of Japan and other G10 banks, which are inclined to tighten their policies.
This week's focus is on inflation data, particularly in the eurozone. We expect March's flash inflation number, which will be released on Friday, to be another record. In the US, the PCE inflation report will be released on Thursday, but that is from February and therefore does not provide much new information. Finally, we will get the US jobs report on Friday afternoon, with most of the focus on wage developments. It has so far lagged behind prices and is fueling voters' dissatisfaction with the democratic administration in Washington.
Market strategists continue to revise their forecasts for the commodity currency upwards – in line with the bullish expectation we have had for some time. The inflationary environment is here to stay for some time. As a result, currencies of emerging markets and of G10 countries, which are net exporters of commodities, have the tailwind. Below are the main currencies in detail.
The PMI indicators for economic activity were better than expected. They point out that the war in Ukraine is causing only a slight stagnation of economic activity in the eurozone. The IFO business confidence indices in Germany were worse, but we think the PMIs provide a better picture of expected economic growth. Monetary and fiscal policy will remain highly stimulative for the time being. In our view, a recession is extremely unlikely. Due to the sharp rise in energy prices, inflation in March, which will be announced on Thursday, could be above 7%. The key figure is also expected to take a leap. Markets are pricing in the fact that the ECB will not raise rates until the end of 2022, but we are increasingly sceptical and think it is quite possible that the central bank will be forced to do so before the summer due to the current data. Pricing in this by the markets should provide support for the euro.
Although economists are quick to revise their forecasts for inflation in the UK, the actual figures are still an upward surprise. In February, prices rose by 6.2% year-on-year. This news weakened the British pound. After the 'dovish' announcements at the last meeting of the MPC, markets are starting to question whether the Bank of England wants to intervene firmly enough to get inflation under control. This week, the MPC members are lining up to speak publicly. Traders will be attentive to every word they say, looking for more clarity after the muddled communication at that meeting. We wouldn't be surprised if the tone changes again and the Bank of England tries to better align with the communications of other central banks. This would give the pound the support it so desperately needs.
The carnage in the U.S. bond market is causing Treasury yields to reprice faster than has been seen in recent decades. Broad bond indices have lost more than ever so far this year. This yield blowout has provided the US dollar with less support than in previous times. Fed representatives are doing their best in large numbers to hint that interest rates will be raised at every meeting and, moreover, in double 50 basis point increments. Both this week's PCE inflation report and jobs numbers are expected to be very strong. The Fed should then have nothing to stop it from raising interest rates. This will not have much effect on the dollar, because the market has already priced in a lot of tightening this year and it will be difficult to price in even more.
By: Enrique Diaz-Alvarez
Enrique Diaz-Alvarez is chief risk officer and heads Ebury's analyst team in New York. Because of his drive, passion and thorough knowledge, Enrique is recognized by Bloomberg as one of the most accurate predictors of market movements.
About Ebury:
Ebury Makes international markets more accessible with tailor-made foreign exchange services and flexible trade credit for businesses. Ebury works with more than 12,000 organisations and carries out €12 billion in foreign exchange transactions in 140 different currencies. The company has offices in the United Kingdom, the Netherlands, Spain, and Poland. Ebury's priorities:
- Financial services normally reserved for large multinationals
- Financing your purchases
- Market knowledge and tailor-made foreign exchange services
- Our network of liquidity providers and intermediary banks
- Transactions in over 140 different currencies
Learn more at www.ebury.nl
Have a look at us YouTube channel
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.
