Decisive Week Ahead: Central Banks, Inflation, and Rate Risks Take Center Stage
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Rates Spark: Getting into position for a decisive week
Featuring US CPI data, three major central bank meetings - if one adds the Bank of Japan - and substantial bond supply, next week should shape up to be a decisive one for rates markets. We see largest the upside risks to rate levels from a surprise hike by the Fed. On the other end the "skip" narrative should prevent markets from extrapolating a pause towards cuts.
Central banks to decide against backdrop of still high inflation but heightened macro uncertainty
Markets are bracing for a decisive week which sees central bank decisions from both the Federal Reserve and the European Central Bank. The backdrop of late has been one of heightened macro uncertainty, but with inflation still running uncomfortably high.
Especially in the US, ambiguous signals from the jobs market have jolted rates markets around. Following a very strong payrolls number, we have now seen yesterday what could be the first signs of lay-offs feeding through to the weekly jobless claims data.
In the eurozone, final 1Q GDP data has now confirmed that the economy was in a (shallow) technical recession, while prospects for a notable uptick in the second quarter are dim. At the same time, the jobs market here remains resilient and inflation is still painfully slow in turning lower.
As central banks’ usual modelling has proven of limited use in the post-pandemic and geopolitical crisis-ridden world, they have become increasingly reliant on current data to guide their policies. Next week, that will mean an increased focus on Tuesday’s US CPI data just a day before the FOMC meeting. A core rate printing above the 0.4% month-on-month rate that the consensus is currently expecting could well swing the market back towards pricing in a hike. Note that in the week we will get more indications about pipeline price pressures from producer prices as well as import prices.
And at the end of the week looms the University of Michigan's consumer survey including inflation expectations.
