2023 Weekly Views

Highlights

On rates

In the wake of the recent central banks’ hawkishness, US, German and UK two-year sovereign bond yields continued their ascent over the week (around +10 bps), with the UK gilt yield still standing at the highest level of the three at 5.1% (on 22 June). The only exception was the two-year Swiss government bond yield which fell to 1.15% (-7 bps) despite the Swiss National Bank opening the door for an additional rate hike in September. Looking at the future policy rate paths expected by market participants, they held steady for the Fed and the ECB over the week, with a terminal rate foreseen at 5.3% and 4%, respectively and no rate cuts in 2023. But the surprised 50bps hike of the BoE and rise in core inflation in May led to a sharp repricing there, with a terminal rate expected at 6% at the end of 2023. In this context, 10-year sovereign bond yields held up well over the week, which led to a further inversion of the yield curve slope (10-year-to-two-year) to -100 bps in the US, -70bps both in the UK and Germany, and only -12 bps in Switzerland. Such an inversion suggests that market participants expect additional policy rate hikes not only to weigh on economic activity, but also to lead to a return to the inflation target over the medium-term, which probably helps anchoring long-term yields.

Market update

More hikes

The S&P 500 closed the week at 4,348.33, -1.75% lower. The Dow Jones closed at 33,727.43, -1.98%, with the Nasdaq lower by -2.11%. The volatility index VIX closed the week at 13.44 down from 13.54. The Euro Stoxx 600 slipped -3.35%.

The 10-year UST closed at 3.73% down from 3.76% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -157bps. US Corporate Bond spreads: Investment Grade tightened 3bps at 199bps and High Yield widened 3bps at 454bps. German 10-year Bunds yield closed at +2.35% down from +2.47% a week before. In Europe, Corporate Investment Grade spreads widened 1bp at 174bps and High Yield spreads widened 14bps at 456bps.

The US Dollar Index (DXY) appreciated +0.65% last week and closed at 102.90. The Euro closed at 1.0894 (-0.39%); the Yen depreciated -1.33%, closing at 143.70 and the Swiss Franc depreciated -0.36%, closing at 0.8970. Gold closed at $1,921.20 depreciating -1.88%. Oil was lower, Brent closed at $73.85 (-3.60%) and WTI at $69.16 (-3.65%).

Macroeconomy

Swiss National Bank

The Swiss National Bank (SNB) increased its policy rate by 25bps, as expected and compared to previous 50bps hikes. It brings the SNB’s main policy rate to 1.75%. The SNB published its updated ‘conditional inflation forecasts’. The new forecast puts average annual (headline) inflation at 2.2% for 2023 and 2024, and 2.1% for 2025. The current forecast from 2024 on is higher than it was in March, despite today’s increase in the SNB policy rate. The reasons for this are the ongoing second-round effects, higher electricity prices and rents, and more persistent inflationary pressure from abroad. With inflation still expected to be above its definition of price stability in Q1 2026 (the last data point), the SNB is signaling that more tightening may be warranted. Even if inflation in Switzerland is closer to the central bank’s inflation target, the SNB sounded worried about the medium-term inflation outlook. Like the ECB last week, it revised up its inflation forecasts for 2024 and 2025, suggesting that high interest rates could persist, even in Switzerland.

Bank of England

The Bank of England hiked its policy rate by 50bps to 5%. That’s the highest Bank Rate since 2008, and it came as a surprise to investors who still viewed a 25bps hike as more likely, even after the upside inflation surprise the previous day. The decision was supported by a 7-2 majority of the MPC, and their statement acknowledged that recent data “indicates more persistence in the inflation process, against the backdrop of a tight labor market and continued resilience in demand.” In a separate letter to the Chancellor, Governor Bailey signaled the bank’s determination to clamp down on inflation, saying that “Bringing inflation down is our absolute priority”. The day before, both UK headline and core CPI surprised on the upside for a 4th consecutive month. That left headline CPI at +8.7% (vs. +8.4% expected), and core CPI hit a 31-year high of +7.1% (vs. +6.8% expected). This persistence for both headline and core is now making the UK a real outlier on inflation, with the highest rate in the G7 by some margin. For instance, headline Euro Area inflation “only” stood at +6.1% in May, and if you calculate US inflation on the same basis as Europe does, then the comparable headline measure is now down to just +2.7%. Lastly, UK debt-to-GDP ratio surpassed 100% of GDP for the first time since 1961.

Norges Bank

The Norges Bank also surprised market expectations with a 50bps hike, bringing the policy rate at 3.75% at its June meeting. Norges Bank’s projections for the terminal rate was revised higher to 4.25%. Investors expect rate differentials turning more supportive of the krone. However, weak energy prices and concerns over an economic slowdown in the US may remain a drag for the krone in the short term.

June PMIs

The S&P Global Flash U.S. Composite PMI fell 1.3 points to 53.0. Although this reading marked a three-month low, the PMI held in expansion territory for a fifth straight month. Growth was entirely driven by the services sector, which saw its PMI ease 0.8 points to 54.1. It was still the second-highest reading since April 2022 and well above the consensus for a much larger decline to 53.3. New orders remained strong, boosted by export orders, while the future output index rose to the highest in over a year. Employment grew at a slower pace, due to worker shortages, which contributed to a build-up in backlogs. Input costs accelerated to a five-month high, led by higher labor costs, but charge prices rose at a slower pace as businesses wanted to remain competitive. Manufacturing shrank at a faster pace, as the PMI slumped 2.1 points to 46.3, a six-month low and notably below the consensus of 49.0. The euro zone’s flash composite PMI dropped to 50.3 in June from 52.8 in the previous month. This was below the 52.5 expected by analysts. A reading above 50 marks an expansion in activity, while one below 50 marks a contraction. On a country-by-country basis, data earlier in the day from Germany also showed a slowdown. The German flash composite PMIs fell to 50.8 in June from 53.9 in May. In France, the composite PMI sunk to 47.3 from 51.2 in May, well below the 51 expected. This was primarily due to weakness in the services sector.

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.)