Markets souring
Markets ended the week on a sour note with bonds and equities both selling off on Friday as energy prices remained volatile and expectations for central bank rate hikes hardened further. It is a case of more of the same at the start of this week following Trump’s weekend threat to “obliterate” Iran’s power plants if it does not agree to reopen the Strait of Hormuz. Asian equity markets were sharply lower in overnight trading, while US bond yields continued to head north. The dollar is firmer this morning having given up some ground generally over the course of last week. It is trading at around $1.1530 against the euro and at $1.3320 versus sterling, with the pound down at about £0.8660 against the single currency having shed circa half a penny on Friday.
The firming of rate hike expectations is continuing at the start of play today, leaving the market now expecting circa 90bps and 100bps of tightening from the ECB and Bank of England this year respectively and attaching about a 70% chance to a 25bps rate increase from the Fed. Not surprisingly, bond yields are higher again at the open this morning having risen sharply on Friday (UK yields rose by 13-16bps on the day, US yields increased by 10-13bps, while German yields were about 7-8bps higher). Equity markets closed at their lows of the day on Friday, with the S&P 500 and the Stoxx Europe 600 shedding around 1.5% and 2% respectively, and remain very much on the back foot this morning.
ECB member Nagel says the central bank “must remain very vigilant” in relation to inflation risks and “can react quickly if necessary.” He notes that “sharp increases in energy prices can lead to broad-based gains in inflation,” adding that “the likelihood of this happening increases the more energy prices rise and the longer they remain at elevated levels.”
In terms of economic data for the week ahead, the main releases include flash PMIs for March in the Euro area, UK and US tomorrow (Tuesday); CPI inflation and retail sales (both for February) in the UK on Wednesday and Friday respectively; and the ECB’s latest wage tracker and survey of consumers inflation expectations (February) on Monday and Friday respectively. A large number of central bank members are scheduled to speak over the course of the week.