This is definitely a very challenging time for investors. The fight against inflation is and will remain the number one factor moving markets, and this week sees a lot of fresh data to digest.
US inflation released on Tuesday is expected to have risen by 8.5% over the past year, 0.6% above the previous 40-year high of 7.9% in February. March inflation figures will begin to reflect the impact of the Russia/Ukraine war on prices and given there’re no signs of this war ending soon, they are likely to remain elevated. The Fed can’t do anything to control inflation produced by sanctions on Russia or the supply bottlenecks with the new Chinese lockdowns. But, policymakers have no alternative but to turn more aggressive on policy tightening as inflation becomes out of control.
Like in the US, Britons are struggling with rising inflation. It may even be worse in the UK as a higher cap on energy prices will be introduced this month. The UK CPI release on Wednesday will be closely watched to anticipate the Bank of England’s next move.
While the Bank of Canada and Reserve Bank of New Zealand are both expected to raise rates this week, the ECB is likely to hold fire. However, will the European central bank end bond purchases earlier or stick to the third quarter? That could provide a signal as to when the ECB is ready to lift rates.
In theory, this environment of rising interest rates is positive for the financial sector, especially for banks. However, they are likely to show profits reduced by more than 30% in the first quarter given the drop in M&A activity, IPO listings, and trading. Higher interest rates are still good for retail banking if it does not lead to a recession, so it will be interesting to watch the earnings announcements from the big US banks this week.
After a positive start to the week, US equity futures took a hit as bond yields rose across the curve, indicating that the recovery from last week’s selloff will prove to be hard.
The sharp increase in yields over the past several days reflects investors’ perception of how hawkish the Federal Reserve is turning and another sign that interest rates may begin to go higher, by 50 basis points instead of 25, at its next meeting.
US 10-year yields rose six basis points in Asia trade, almost reaching 2.78%. The benchmark has traded above 3% only twice in the past decade, and very few saw this coming in 2022. Meanwhile, real interest rates are fast approaching positive territory, with the US 10-year TIPS trading at -0.11% at the time of writing.
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