Exclusive insight for TMI subscribers! Northern Trust Asset Management share a monthly market commentary for treasurers.
Eurozone Market Update
April’s European Central Bank (ECB) meeting minutes were viewed as dovish but outdated by the time of their mid-May release. Throughout May, committee members discussed the need to move towards normalisation in ECB policy, starting with a first rate hike in July. Influential committee members, such as German economist Isabel Schnabel and President Lagarde, also suggested negative rates would be left behind by the end of Q3, implying at least two 25 bps hikes. Overnight indexed swap rates barely changed despite this hawkish shift. We believe the ECB will hike rates back to zero in the coming meetings, for the first time since 2014.
UK Market Update
The Bank of England (BoE) delivered its fourth consecutive rate hike, moving its base rate to 1.00%. The 6–3 vote was slightly more hawkish than the market expected. However, at least two members noted further hikes were no longer appropriate, given the weak medium-term outlook. The BoE 2022 inflation forecast jumped to 10.25%, while economic contraction is predicted for 2023, raising fears of a recession. The UK economy contracted 0.1% in March (see Chart of the Month), while both the manufacturing and services Purchasing Managers’ Index numbers came in below consensus. Chancellor Rishi Sunak recently announced a £15 billion fiscal package to address energy price rises, challenging inflation and recession fears and opening the door to a more hawkish BoE.
US Market Update
As expected, the Federal Open Market Committee (FOMC) increased rates by 50 bps in May. Fed Chair Powell indicated a further 50 bps hike at each of the next two meetings to address persistent higher inflation, but was adamant that a 75 bps hike is not being actively considered. In April, headline CPI inflation rose 0.3%, with its core component rising 0.6%. While year-over-year CPI eased, headline inflation (CPI) and core inflation — at 8.3% and 6.2%, respectively — remain firmer than last month. Labour market data shows tightness as the unemployment rate remained unchanged at 3.6%. Overnight index swaps price in a further seven hikes by the end of the year, with continued front-loading through the end of Q3.
Global Outlook
We do not expect any shocks at the three central banks’ June meetings because each has already given guidance around policy changes. We think the Fed and BoE will deliver hikes of 50 bps and 25 bps, respectively, and the ECB will continue their guidance of a July start for rate hikes. Each central bank’s comments will offer insights into the future direction of policy action, particularly regarding growth concerns in the second half of 2022. Many economists have cut growth forecasts as recession fears accelerated in May, with disappointing corporate earnings from retail companies contributing to risk markets selling off. If central banks share those concerns, they will likely pare back the number of rate hikes they deliver.
Chart of the Month: Monthly UK GDP data highlights the fragile nature of post-pandemic economic recovery
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