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This Week: Brace for more aggressive Fed

Last Friday’s hotter than expected US inflation data scotched hopes that price pressures were easing.

The aftershocks from that key data release is still reverberating across markets at the onset of this new trading week, especially in the leadup to this week’s pivotal Fed policy meeting, nestled among these other scheduled economic data releases and scheduled events:

Monday, June 13

  • GBP: UK April monthly GDP, industrial production, trade data
  • NOK: Norway April monthly GDP

Tuesday, June 14

  • AUD: Australia May household spending and business confidence
  • JPY: Japan April industrial production
  • EUR: Eurozone June ZEW survey expectations
  • GBP: UK April unemployment rate, May jobless claims

Wednesday, June 15

  • AUD: Australia June consumer confidence
  • CNH: China May industrial production, retail sales, unemployment
  • EUR: Eurozone April industrial production, trade balance
  • EUR: Speeches by ECB President Christine Lagarde and other officials
  • USD: Fed rate decision, US May retail sales
  • US crude: EIA weekly US crude inventories

Thursday, June 16

  • NZD: New Zealand 1Q GDP
  • JPY: Japan May external trade
  • AUD: Australia May unemployment, June consumer inflation expectations
  • GBP: Bank of England rate decision
  • EUR: ECB officials’ speeches
  • USD: US weekly initial jobless claims

Friday, June 17

  • NZD: New Zealand May manufacturing PMI
  • JPY: Bank of Japan rate decision
  • GBP: UK May retail sales
  • EUR: Eurozone May CPI (final)
  • USD: US May industrial production

 

As a reminder, last Friday’s US consumer price index showed an 8.6% year-on-year advance in May – above all economists’ estimates and also a fresh 40-year high.

In turn, market bets of how far the US Federal Reserve will lift interest rates to curb the inflation beast are setting new cycle highs.

Markets quickly scrambled to recalibrate how they think the Fed will react to this latest crucial evidence that US inflation is proving harder to subdue than previously envisioned.

The US Treasury 2-year yield, which closely maps Fed Funds futures, has surpassed the 3% level, its highest since 2007. Fed Funds futures now show a 23% chance of a 75bp hike at this week’s meeting, above the already priced in half point rate rise.

The priority for the US central bank is clearly to continue front-loading rate hikes and to quash inflation, despite concerns about eroding economic growth.

This also means investors are increasingly fixated about recession risk, as evidenced by the risk-off tone to start off this trading week.

This environment of the Fed driving real interest rates higher is set to be bad for risk assets and stocks, and good for the greenback.

US dollar bulls could well eye the 105 handle once more for the benchmark dollar index, DXY, especially if the Fed concedes this week that it will have to turn even more aggressive in its quest to vanquish the inflation beast.

This Week: Brace for more aggressive Fed

 

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