The movers on the market today
UK CPI inflation for May is expected this morning. Inflation is expected to remain very high, so there is certainly still a lot of pressure on the Bank of England to raise the bank rate further despite concerns about the economic outlook.
Along with UK inflation, we also receive Swedish unemployment data. Due to the high volatility of the unemployment figures, we refrain from providing an official forecast. However, we take a close look at hours actually worked, as they are an important indicator of economic activity and thus the GDP outcome for the second quarter. Danish consumer confidence also came out this morning.
Later in the day, we’ll be watching weekly US mortgage applications as risks in the housing market increase due to rising interest rates. Eurozone Consumer Confidence is due at 4:00 p.m. CEST. Consumer confidence is expected to remain at depressed levels as consumers continue to suffer from high inflation rates.
In addition to this, there are several central bank speeches. Most notably, Fed Chairman Jerome Powell’s testimony to Congress. We also hear from other Federal Reserve policymakers, Jon Cunliffe of the Bank of England and SNB Chairman Thomas Jordan.
The overview in 60 seconds
Markets: Sentiment deteriorated overnight as fears of recession returned to the markets. After a few days of relief, large equity futures are trading solidly in the red this morning and yields are also falling. Brent crude has shown remarkable resilience this spring. Despite China’s weakness and the record sale of strategic oil reserves, oil prices have until recently managed to stay flat or even rise. Meanwhile, that appears to have changed over the past week amid growing concerns over global growth and this morning Brent Crude fell to 111 USD/bbl. The USD is stronger and cycle-sensitive currencies are trading against the grain again. It’s hard to pin down the change in mood to a single event this morning. Instead, it highlights the broader challenging macro backdrop for risky assets, as central banks forcefully tighten policy amid a cyclical downturn.
Bank of Japan (BoJ): Amid a window of opportunity to finally bring inflation and inflation expectations back on target, the BoJ remains one of the very few global central banks that has so far failed to signal the need to tighten its monetary policy. The BoJ is still operating with yield curve control targeting 10-year Japanese government bonds at 0.25% – well below current market levels for government bonds in the rest of the world. In order to defend its yield target, the BoJ needs to buy massive amounts of bonds and thus add equivalent amounts of JPY into the Japanese money market system. This contributed to a record weakening of the JPY and an interesting link to Fed monetary policy: the more the Fed tightens, the more the BoJ is forced to ease.
The JPY decline resumed this week and while risk appetite has slightly supported the JPY, USD/JPY yesterday traded at 136.5 – the highest level since 1998. Renewed pressure on the JPY comes from markets realizing that the Bank of Japan (BoJ) is not planning to bow to global pressure for higher yields. Yield curve control remains in place. Last week the BoJ decided not to change its policy stance and this week Prime Minister Kishida confirmed his support for BoJ yield curve control.
Long-term Japanese inflation expectations have risen over the past year, but remain below 1% and thus still well below the BoJ’s 2% inflation target. For this reason, we do not expect the BoJ to relinquish its control of the short-term yield curve. Yet, we still emphasize that this is one of the biggest macroeconomic risks and global market events for years to come. Lessons from the Swiss National Bank in 2015 show that removing market price targets can lead to substantial market volatility. When the BoJ finally decides to abandon its policy, it would act as a global duration shock not only for Japan but also for the rest of the world.
Property prices in Sweden: Given that the Danske Bank house price indicator for fixed prices in Stockholm showed a price decline of 3% (-1.3% SA) in May, it is not surprising that the index HOX Valuegard house price data this morning revealed a nationwide slowdown for the housing market of 1.6% (-1.2% SA). Among major cities, apartment prices in Stockholm have fallen the most (-3%) according to HOX Valuegard. Early indications for June show further decline at the same time as trading volumes in May and June (so far) are significantly below normal.
Shares: Stocks were almost 2% higher yesterday and virtually no news. This of course speaks to the period of volatility we find ourselves in and the enormous uncertainty among investors. As has been the case for most of 2022, we are seeing a more or less continuous decline in the share of equities in balanced funds and we are at a level where pessimism is extremely high. When pessimism is at the current level, it doesn’t take so much good news to bring a 5-10% rally in stocks. Defensive stocks slightly outperformed cyclical stocks, which in itself is not so special. However, with markets up 2%, we would generally see cyclical stocks outperform if investors become more bullish. As a defensive outperformance, this tells us that investors are not convinced that a sustainable rally lies ahead. In the United States, Dow +2.2%, S&P 500 +2.5%, Nasdaq +2.5% and Russell 2000 +1.7%. Asian markets are down across the continent this morning and so are European and US futures which have been falling steadily overnight.
FI: Global bond markets have yet to decide whether to increase recession risk in yield curve pricing or whether tighter global monetary policy can successfully achieve a “soft landing”. Support for more US frontloading continues to be strong. Yesterday, the Federal Reserve member from Richmond supported the “75 basis points” strategy, saying that key rates should be raised as soon as possible. We have more speeches tonight from members of the Federal Reserve, including Fed Chairman Powell.
The discussion on the anti-fragmentation tool brought stability to the BTPS-Bund spread which is again below 200bp. Therefore, it provided some short-term stabilization.
Effects : Amid declining risk appetite overnight, the USD appreciated while commodities and cycle-sensitive currencies weakened.
Credit: European credit markets had a relatively quiet day on Tuesday with the main iTraixx tightening 1bp to 107bp and Xover tightening 4bp to 538bp. Overall, the credit market currently appears to be in consolidation mode after a significant widening of spreads in recent weeks.
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