2023 Weekly Views

Highlights

Rates

In the wake of the surprised rate hikes from the Australian and Canadian central banks, short-term developed markets government bond yields moved up. The US two-year yield stands at 4.60%, higher than its Canadian counterpart (at 4.49%). The gap widened and market repricing for more aggressive policy rate path was dampened by the surprised rise in US jobless claims on Thursday, which led to a rally in 10-year developed markets sovereign bond yields, and further yield curve flattening (to -86 bps for the 10-to-two-year part in the US and to -112 bps in Canada). The 10-year Australian government bond yield stands at 3.95% and has now surpassed its US counterpart, which stands at 3.74%.

Market update

Spotlight on central banks

The S&P 500 closed the week at 4,298.86, +0.39% higher. The Dow Jones closed at 33,876.78, +0.34%, with the Nasdaq higher by +0.14%. The volatility index VIX closed the week at 13.83 down from 14.60. The Euro Stoxx 600 slipped -0.46%.

The 10-year UST closed at 3.74% up from 3.69% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -152bps. US Corporate Bond spreads: Investment Grade tightened 3bps at 207bps and High Yield tightened 27bps at 468bps. German 10-year Bunds yield closed at +2.38% up from +2.31% a week before. In Europe, Corporate Investment Grade spreads tightened 4bps at 179bps and High Yield spreads tightened 33bps at 465bps.

The US Dollar Index (DXY) depreciated -0.44% last week and closed at 103.56. The Euro closed at 1.0749 (+0.38%); the Yen appreciated +0.37%, closing at 139.40 and the Swiss Franc appreciated +0.64%, closing at 0.9091. Gold closed at $1,961.19 appreciating +0.68%. Oil was lower, Brent closed at $74.79 (-1.76%) and WTI at $70.17 (-2.19%).

Macroeconomy

FOMC meeting

The FOMC is expected to meet this week with the corresponding policy announcement on Wednesday June 14. Investors price the FOMC to keep rates unchanged, while retaining a hawkish bias. The risk is for a 25bps rate hike, of which the markets are currently pricing a 31% chance. Importantly, Chair Powell and some Fed governors, the core of the committee, recently signaled a willingness to skip a rate hike in June to better assess the lags of monetary policy tightening and any impact from banking sector stress. Chair Powell will likely continue to push back against rate cuts pricing, noting that although rates are near or possibly at sufficiently restrictive levels, the next move is more likely to be a hike than a cut. Since the last FOMC meeting, labor market data have shown tentative signs of cooling and inflation pressures are easing somewhat. But overall unemployment remains low and inflation stays way above target. Next CPI report is expected on Tuesday. In terms of employment, we have seen conflicting signals between solid establishment survey and weak household survey. Hiring remains solid as some sectors play catchup, some laid off workers, while large services sectors keep hiring. Household survey employment declined due to a large drop in self-employment, but if adjusted to payrolls concept it was strong at +394k. On the other hand, employers hold on to workers while cutting hours as the average workweek fell sharply. But layoffs might be on the rise - the most recent data show initial jobless claims rise by +28k to a two-year high. Job openings remain high but the official government data suffer from plunging response rate..

ECB meeting

The ECB will also meet this week on Thursday June 15. Investors expect the ECB to deliver a 25bps rate hike bringing the deposit rate to 3.5% and to confirm that APP (Asset Purchase Program) reinvestments will be discontinued as of July 2023. The bigger question will be about the forward guidance. Market expects the ECB to keep doors open for more rate(s) hike(s) in the next meetings. In terms of economic data, Euro area real GDP was revised down to -0.1% q-o-q from 0.1% in the third release for Q1 23. Excluding Ireland, Q1 GDP was up mildly by 0.1% q-o-q. Q1 GDP contraction comes after -0.1% q-o-q in Q4 22, meaning that the euro area was in a technical recession (defined two consecutive quarters of negative growth). The GDP details showed that consumption drove the weakness: private consumption fell for the second consecutive quarter, as high inflation reduced purchased volumes. Government spending also dropped sharply, particularly in Germany. Euro area employment grew by 0.6% q-o-q in Q1, outpacing GDP growth for the second consecutive quarter. The resilience of job creation suggests the winter slowdown in real activity was not quite a proper recession.

Other central banks

The Bank of Canada delivered an unexpected 25bps rate hike. They announced they were taking their overnight rate up to a post-2001 high of 4.75%, and their statement said that that “excess demand in the economy looks to be more persistent than anticipated”. In light of this, they wrote that “concerns have increased that CPI inflation could get stuck materially above the 2% target”, and they said they were hiking since “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.” Looking forward, they didn’t provide too much of a steer on future policy, but markets then moved to price in a further hike in July as the most likely outcome. The Reserve Bank of Australia (RBA) lifted its official interest rate by +25bps to 4.1%, a level not seen since early 2012 amid concerns inflation is taking too long to come down. Markets overall had anticipated no change for this month but a number of economists had made a late call for a hike in recent days so it wasn’t a total surprise. Markets repriced terminal 20bps higher after the hike. Looking ahead, speeches from the RBA Governor Philip Lowe and Deputy Governor Michele Bullock scheduled for tomorrow will be the key to gaining any hints for future rate hikes from the central bank.

What to watch

• Monday: US ISM manuf. index (Apr.)
• Tuesday: Australia RBA decision (May); Euro area: final PMIs, M3 (Mar.), Bank Lending Survey (Q1), flash HICP (Apr.); US durable goods (Mar.)
• Wednesday: US FOMC decision (May); US ISM non-manufacturing index (Apr.)
• Thursday: Norway Norges Bank decision (May); Euro area ECB decision (May); US trade balance (Mar.)
• Friday: Germany factory orders (Mar.); US: nonfarm payrolls (Apr.)