The appointment of Erik Thedéen as the new Governor of the Riksbank will only strengthen the relationship between the Bank and the financial regulator, and could result in more macroprudential powers being brought under the oversight of the Bank. It was …
17th June 2022
We think the sell-offs in US government bonds and equities have further to run, and have revised our forecasts for 10-year Treasuries and the S&P 500 accordingly. US bonds and stocks have been volatile this week amid a raft of central bank decisions, …
We held a Drop-In yesterday to discuss recent developments in central banking and related financial market implications. This Update answers several of the questions that we received, some of which we couldn’t fit in during the event and some that we are …
Despite consumer confidence remaining extremely low, we now think household spending in the euro-zone will edge up in Q2. Excess savings and a tight labour market have helped to cushion the blow from higher prices and enabled households to release their …
The Bank of Japan gave no ground at all to bond traders today as it left all its major policy settings unchanged. Governor Kuroda was resolute in claiming that Yield Curve Control has no limits in his press conference. But the likelihood is that defending …
The Bank of Canada’s hawkishness, a widening of mortgage spreads, and news that at least one lender is restricting new loan applications suggest the outlook for house prices is worse than we previously feared. Lenders tripped over themselves to provide …
16th June 2022
Russia’s decision to once again cut supplies to Europe makes the region’s gas supply look increasingly precarious. The move will slow regional stock builds and keep prices historically high . Russia’s monopoly gas exporter, Gazprom, announced on Wednesday …
Strong demand for labour, not a lack of potential workers, has driven the euro-zone’s unemployment rate to a record low. Employment gains have been biggest in public services and we expect demand for labour to hold up even as economic activity softens …
Shortages of food supplies and surging prices have led some EMs to impose export restrictions on key agricultural products, a trend that threatens to become more prevalent and serve to keep prices elevated and inflation high. Some EMs are also attempting …
Robust Chinese refined metal output, alongside subdued domestic demand, has combined with constrained refined output elsewhere to provide greater export opportunities for China. But there are limits on the extent to which Chinese metal can fill the …
By raising interest rates by 25bps (basis points) today, from 1.00% to 1.25%, rather than by 50bps or the 75bps the Fed announced last night, we think the Bank of England is putting too much weight on the softening economy and not enough on surging …
India’s goods trade deficit didn’t widen in the immediate aftermath of Russia’s invasion of Ukraine – rather counter-intuitively for a major commodity importer. But that has now started to happen, and a closer look at the data suggests the deficit may …
Taiwan’s central bank today raised interest rates by 12.5bp (to 1.50%) and appeared to indicate that rates would be raised further this year due to concerns about rising inflation. But we think the tightening cycle will be gradual. The central bank was …
The latest data from Nigeria suggest that the economic rebound slowed further at the start of Q2, and we think that the recovery will remain lacklustre over the coming quarters. The weakness of the economy may give monetary policymakers second thoughts …
After the excitement of yesterday’s ECB emergency meeting and 75bp hike by the US Fed, the SNB kept its end up by unexpectedly raising its policy rate by 50bps this morning – its first rate rise since 2007. Given its history of unscheduled announcements, …
The recent falls in the Turkish lira have led to increased speculation that, with the CBRT showing no sign of willingness to raise interest rates, policymakers will be forced to turn to capital controls to prevent sharp and disorderly moves in the …
While the Brazilian central bank’s tightening cycle is drawing to a close, the statement accompanying yesterday’s 50bp increase in the Selic rate (to 13.25%) left the door open to additional hikes. With Copom sounding a little more worried about inflation …
The Fed’s larger 75bp rate hike came as little surprise to the markets following the worse than expected May CPI data and Monday’s tip-off in the Wall Street Journal. Our view that inflation will remain uncomfortably high and that the economy will avoid a …
15th June 2022
The prospect of even tighter Fed policy than we had previously envisaged (see here ) raises the risk of a worse outcome for the US economy and corporate earnings further down the line than we had assumed. So, we now suspect that the 10-year Treasury yield …
We think the Bank of Japan (BoJ) will widen the tolerance band around its 10-year Japanese Government Bond (JGB) yield target, and that the yield will consequently rise by around 25bp. But there is a clear risk of a larger and more disorderly sell-off …
The Turkish lira is once again depreciating sharply against the US dollar and we expect this to continue. We revise our forecasts for the lira and pencil in further substantial weakness by the end of 2022, to 24/$. The lira has plunged ~15% or so against …
The ECB’s press release following its unscheduled meeting fell short of announcing a fleshed out spread-fighting tool that could provide a permanent solution to the problem. Flexible PEPP reinvestments might buy policymakers a little time, but the new …
The closure of the Freeport LNG facility in the US, for up to six months, adds to concerns about Europe’s ability to fill its gas storage tanks ahead of winter. We always suspected that supply concerns would re-emerge this year and, as a result, we …
News that the ECB Governing Council is holding an emergency meeting today shows that policymakers are taking the threat of rising peripheral yields more seriously than they were last Thursday at their regular policy meeting. Ten-year Italian yields have …
The 5.2% increase in the minimum wage announced by the Fair Work Commission will directly lift the Wage Price Index by around 0.7%-pt. But the increase will also contribute to upward pressure on wage growth and inflation more generally. On that basis, the …
The prospect of tighter Fed policy than we had previously envisaged (see here ) presents upside risks to our forecasts for the 10-year Treasury yield as well as downside risks to our forecasts for the S&P 500. The moves in financial markets have been …
14th June 2022
Capital outflows from EMs appear to have eased over the past month, but rapidly tightening external financing conditions mean that this won’t last for long. Large outflows already seem to have pushed Turkey to the brink of a(nother) currency crisis, and …
We suspect that the spread between 10-year Italian and German government bonds would need to widen by another 100bp or so, to around 3.5%, to force the ECB to make a stronger formal statement of support for peripheral bonds. And even then, any initial …
A strike by truck drivers in Korea is causing significant disruption. Prolonged industrial action could add to strains on global supply chains and would lower Korean GDP. Even if the strike ends soon, there could be lasting implications if it causes …
A recent MSCI article speculated that real estate investment could buck the deglobalisation trend given distinct features of the asset class, though we are not convinced that will bring many benefits. We have been writing about the end of globalisation …
Leading indicators are pointing to a large fall in existing home sales. For example, the recent sharp decline in the NAR buyer traffic balance is consistent with a fall in sales to 4.5m annualised which, excluding the COVID-related dip of 2020, would …
Israel’s labour market has tightened significantly in recent months and while there is so far little sign of a burst of wage pressure coming through, this is likely to be in the pipeline and feed through into stronger core inflation next year. Alongside a …
Last Friday, we warned in our Data Response to May’s CPI report that the unexpected rise in headline inflation opened the door to a 75bp rate hike by the Fed this Wednesday. Media reports this afternoon suggest the Fed will indeed hike by 75bp at this …
The weakening in the yen to a 24-year low and a crack in the Bank of Japan’s ceiling on 10-year yields today is putting significant pressure on policymakers to respond. FX intervention is a possibility, but we doubt it would be effective. We suspect the …
13th June 2022
Chile is likely to run a current account deficit of 7% of GDP this year, the widest since 1985. Worryingly, this deficit is being increasingly funded by volatile portfolio inflows, making the economy (and currency) particularly vulnerable to swings in …
Housing markets are now showing signs of starting to weaken. While the consensus is that house price inflation will merely slow, we expect outright prices to fall in several of the most vulnerable markets. We have highlighted before which housing markets …
Greece has already made a more complete recovery from the pandemic than most of its peers and the short-term outlook still looks relatively good. The country is less exposed to Russia-Ukraine risks than many, and surging tourism revenues should lift GDP …
The Prime Minister last week announced a trio of policies aimed at reversing the decline in home ownership since the financial crisis. We doubt the schemes will make a big difference, although more consistent availability of low deposit mortgages could …
We are raising our forecasts for euro-zone 10-year government bond yields and “peripheral” spreads to reflect the ECB’s further hawkish shift as well as its apparent unwillingness to commit to a strong backstop for peripheral bond markets . The sell-off …
10th June 2022
Tighter ECB policy could cause house prices in the euro-zone to fall, but we think that a housing crash will be avoided even in the Netherlands where the risks are largest. Against the backdrop of ultra-loose monetary policy, supportive fiscal policy, and …
The Russian central bank (CBR) delivered a 150bp interest rate cut to 9.50% today as its focus continued to shift away from inflation risks towards supporting the economy. We think further reductions are likely to be more gradual, with rates ending this …
After months of aggressive interest rate hikes, the end of tightening cycles in parts of Emerging Europe and Latin America is creeping closer. But inflation concerns mean that policy rates are likely to remain high for a long time yet. Meanwhile, …
Despite the sharp fall in the US stock market this year so far, US equities still appear much more highly valued than their peers in the rest of the world. While that might not tell us much about the outlook for relative returns in the near term, …
While the spillovers from the renminbi’s depreciation against the US dollar over the past two months have in some ways been similar to previous periods of renminbi weakness, the impact on other emerging market (EM) currencies has differed somewhat from …
9th June 2022
Softer demand for steel in Europe has dragged prices lower recently, despite production in the region being constrained by high production costs. We expect prices to fall a little further to €900 per tonne by end-year from around €950 currently . The war …
The latest polls for this month’s legislative elections in France raise the possibility that Macron’s party and allies may not win a majority. But even so, support from the centre-right might avoid a lame-duck presidency, allowing Macron to push through …
Today’s policy statement and press conference sets the stage for the ECB to raise interest rates by 75bp by September and we expect that to be followed by two more hikes this year. The Bank’s failure to provide any more details about its backstop plans …
While we doubt it will be the main driver of the US dollar, the ongoing reduction in the size of the Fed’s balance sheet (i.e., “quantitative tightening”, or “QT”) adds to our conviction that the greenback will continue to appreciate over the rest of the …
Cancelling all of the Trump tariffs on China would give a smaller direct boost to China’s export sector than many might think. More important would be the signal a unilateral rollback would give that the US wanted a reset in relations. This would lift …
Commodity import volumes revived a little in May, perhaps as virus-related restrictions started to ease. Although demand should pick up in tandem with activity as major cities re-open, we think that high prices and slower export growth will mean that …
