Navigating the Data: Central Banks and Market Concerns

In the end it all boils down to data

That tension between persistently high inflation and recession fears is of course a wider and ongoing market theme. Indeed, yesterday’s market reaction to the ECB and the quick fade was probably more down to mixed US data releases that came out just when Lagarde was set to speak.

 

More hints that US pipeline pressures are easing came from import prices falling faster than expected. And we also saw the weekly jobless claims grind higher again suggesting a softening of the jobs market. As our economist notes, probably not enough to deter the Fed from a potential hike in July following the hawkish pause this week, but enough to keep the market concerned about the outlook. As opposed to the bear flattening in EUR, the US curve bull flattened with the 10Y UST yield dipping towards 3.7%

Overall, central banks this week have given themselves the flexibility and room to tighten policies further should data warrant it, keeping upward pressure on front-end rates. Yield curves could invert further but given how far they already stretch, long-end rates could still follow higher in the near term.

Only the Bank of Japan (BoJ) bucked the hawkish trend set by the Fed and ECB (and likely continued by the BoE next week) today by leaving policy rates unchanged and dismissing calls for an adjustment higher of its yield curve control cap, currently standing at 0.5%. The lack of action today and the view put forward that the current spike in inflation will prove temporary leaves the market guessing about the timing of a potential normalisation of the BoJ's policy setting.

 

The long-end reflects markets skepticism with 2s10s curves inverting further

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Today's events and market view

Some calm may return to markets after the key events of this week. It probably won't last too long with UK inflation and the Bank of England decision lined up for next week. And in the US we will also see Fed Chair Jerome Powell giving testimony to Congress. 

As for today, in the eurozone we will see the release of the final inflation figures for May, but more attention should go to the usual flurry of ECB speakers in the wake of the meeting, though Lagarde pointed out the “broad consensus” around yesterday’s decision. And it seems the ECB has been successful in curbing the market's preoccupation with the terminal rate level and focussing it on a high-for-longer discussion – note the pricing out of future rate cuts as a driver of the front-end move higher since last week.

The main US data release today is the University of Michigan consumer confidence survey, which also includes measures of longer-term inflation expectations. The consensus is for a slight downtick in the latter to 4.1% year-on-year for the 1-year horizon and to 3% for the 5 to 10-year inflation. But we will also see a number of Fed speakers for the first time after the FOMC meeting.

In the end, the data will remain the key, for central banks to assess whether they have done enough on inflation, or markets to discern whether too much has been done already to hurt the economy.