Rates Spark: Central Bank Balance Sheets Under Scrutiny

Rates Spark: Balance sheet chatter

Today's first inflation releases for June from the eurozone will likely confirm what central bankers have been stressing all the while: Their job is not done. But deep yield curve inversions also signal a diminishing reach of their current strategies, which may explain why their balance sheets are moving into focus again.

 

Central banks' current hawkishness is losing some of its reach...

In coming sessions all eyes are on the inflation data, as today we have the German and Spanish country releases in the eurozone, tomorrow the bloc’s flash estimate and also US PCE inflation. And data is showing that while headline pressure is easing, inflation remains far above central banks’ target level.

This is why we have heard the usual hawkish comments from the four governors in their joint panel at Sintra yesterday. More tightening is on the cards, but this was largely only confirmation of what we already knew from prior communication. If anything, Powell’s emphasis that he would not rule out consecutive rate increases in July and September was slightly hawkish against the backdrop of markets only fully pricing one more hike. But as we highlighted before, central banks’ ability to push terminal rates higher and also influence longer rates appears to run into resistance as it faces market scepticism about how much economies will be able to stomach.