The markets saw an increase in volatility towards the end of last week as bond yields ticked up, and that indicated the markets are factoring in more large rate hikes from central banks. The rise in yields applied pressure to gold and the metal fell to its lowest mark since April 2020. Some investors who are seeking lower risk assets are redirecting funds to governments bonds because of the rise in yields. US tech stocks fell too because of the rally in yields as the industry is relatively indebted, and the NASDAQ 100 printed a two-month low.
As a mark of respect for the passing of Britain’s Queen Elizabeth II, the Bank of England postponed its meeting, and the interest rate decision will be delivered on Thursday. The UK CPI rate cooled to 9.9% from 10.1%, and even though the tiny drop is a step in the right direction, it is still a long way from the 2% target set out by the central bank. UK inflation has cooled slightly, but keep in mind the BoE have hiked rates by 1.65% since December last year. On the run up to the June meeting, there was chatter the bank would take things up a notch and life rates by 50-basis points, but in the end only a 25-basis points hike was announced. Last month, we saw a 0.5% hike from the BoE, but it was not a unanimous decision as one of the nine policymakers called for a 0.25% increase. The fact the BoE were slow to carry out a large rate hike, says a lot, but the fact that not everyone was onboard with the move, says even more. At the most recent BoE meeting, Andrew Bailey, warned the UK inflation rate could reach as high as 13.3%, so considering the latest CPI data, it will be interesting to see whether Bailey revises his forecast.
On Wednesday, the Federal Reserve will announce its interest rate decision and the markets are pricing in a high probability of a 0.75% rate hike. Last week, the US CPI rate cooled from 8.5% to 8.3% but economists were expecting 8.1%. The fact the CPI rate came in above estimates, that triggered chatter the Fed will need to maintain their tough stance against inflation. CPI dipped fractionally, which bodes well for the bank, but their target is 2%, so it seems as if a lot more monetary tightening is needed to put a major dent in the CPI. The latest PPI report was 8.7%, a drop from 9.8%. PPI measures the costs that manufactures incur, and if they are falling, that can be a sign that costs will ease up for consumers. Core PPI dropped to 7.3% from 7.6% and seeing as that metric removes volatile components like commodity prices, it is deemed to be a better measure of underlying demand. There is speculation that central banks are intentionally lifting rates to deliberately put the put the brakes on their respective economies as a way of bringing down internal demand. Traders are acting as if 75-basis points hike is a done deal, so the focus will be on the guidance.
On Friday, we will get a snapshot of manufacturing and services in France, Germany, UK, and the US. Germany is the powerhouse of Europe and there are questions hanging over the country because of its heavy reliance of Russian natural gas. The most recent report showed that both the services and manufacturing industries are in contraction territory. The UK services accounts for roughly 70% of total GDP and according to the last report it is expanding at a slow pace. Traders were caught by surprise by the last US services report as it plunged to 43.7, its lowest mark over two years.