Fed Chair Powell reiterates hawkish message

After a couple of quiet days the euro has moved higher against the dollar over the past 24 hours, gaining roughly 0.5% to trade just below $1.10 and continuing its strong performance in June so far. The euro also gained around 0.5% against sterling to trade at £0.86 this morning. Sterling is trading at $1.275 this morning against the dollar.

Over the past 24 hours government bond yields have declined marginally. 10-year German Bund yields are trading at 2.42% this morning, with 10 year US Treasury yields at 3.74% following Fed Chair Powell’s testimony yesterday (see below), while the 10-year UK Gilt yield is at 4.4%.

Equities remained under selling pressure yesterday following gains towards the end of last week, with the S&P 500 falling into the close and ending the day down about 0.5%, with a larger decline of over 1% for the tech-heavy NASDAQ. European equities (Eurostoxx 50) were down roughly 0.5% as well, while the declines in the FTSE 100 were slightly more modest – both the Eurostoxx and FTSE indices have continued to decline in early trading this morning, down a further 0.8%-0.9%.

Fed Chair Powell struck a relatively hawkish, though not unexpected, tone at his testimony to the House Financial Services Committee yesterday, reiterating the Fed’s message following the most recent FOMC meeting. Powell told lawmakers it was a “pretty good guess” that the Fed would hike rates twice more this year (as was indicated by the ‘dot plot’). Powell noted that “inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go” and he emphasised that the labour market remains strong.

The ECB’s Schnapel also spoke yesterday and indicated that she believes the ECB still has work to do in terms of tightening, in line with the message at the ECB’s most recent policy meeting. Bundesbank chief Nagel had a similar message saying there is ‘still a way to go’ to tame inflation.

The focus today will switch to the Bank of England rate decision. With UK inflation surprising on the upside for May (core inflation increased to 7.1% from 6.8% in April, above consensus expectations), and the latest labour market numbers coming in strong (unemployment fell to 3.8%, while wage inflation picked up), some in the market are now even speculating on the possibility of a 50bp hike at today’s MPC meeting. However, most observers are still expecting a 25bp move, though will be watching closely for indications that the terminal rate in the hiking cycle may now need to be a bit higher than previously thought.

On the agenda today, in addition to the BoE, we have further testimony from Fed Chair Powell, while in the euro area we have consumer confidence data and a speech by ECB Vice President de Guindos.