Week Ahead: Continued central bank fallout; Powell testimony

JPY & GBP & EUR took a hammering as the USD & CHF soared, what to expect next week?

  • The US Federal Reserve delivered a 75 bps rate hike, triggering recession fears.

  • The European Central Bank remains a laggard, now working to prevent debt crises.

Activity this week should be based on the follow-through from central bank activity last week. The FOMC lifted rates by 75bps, which wasn’t expected until the “leaked” WSJ article on Monday that suggested the Fed would raise by 75bps, not 50bps.



Swiss National Bank (SNB)

Much to everyone’s surprise, the SNB hiked rates from -0.75% to -0.25%. Expectations were for unchanged. See day chart and reaction to rate increases versus EURO.

Bank of England.

The BOE hiked rates by 25bps, as expected, however noted that it will act forcefully if needed.


Bank Of Japan. JPY

Finally, the BOJ did nothing, except reiterate their easing stance and capping of JGBs at 0.25%. As a result, markets were volatile as traders feared that higher interest rates could lead to a recession. In addition, this week Fed Chairman Powell will testify in front of the Senate Banking Committee. Look for him to clarify comments from the FOMC statement or the press conference.


FOMC


The FOMC hiked rates by 75bps last week to bring rates to 1.75%. This was the largest interest rate increase since 1994! Fed Chairman Powell noted that the Fed most likely would only have hiked 50bps if it hadn’t been for the 8.6% YoY CPI for May and the higher than expected Michigan Inflation Expectations. The intention to raise rates by 75bps was leaked to the press on Monday. Chairman Powell said that the Fed’s main concern is to lower inflation towards its 2% target while the labour market remains firm. In addition, he noted that a 75bps was not going to be the norm, however the July interest rate decision could be 50bps or 75bps. The Committee also revised inflation and unemployment forecasts higher, while lowering growth targets. The DXY traded to its highest level since November 2002 to 105.79, while the S&P 500 sold off nearly 6%. Watch for additional volatility this week!



SNB


To the surprise of almost everyone, the SNB hiked rates by 50bps to bring them from a record low of -0.75 to -0.25. This was the first rate hike for the central bank in 15 years! The statement mentioned that the rate hike was aimed at preventing inflation from spreading more broadly to goods and services unaffected by the impact of the Russia/Ukraine War. The SNB also increased its year end inflation expectations from 2.1% to 2.8%. Note that the CPI reading for May was 2.9% YoY. The Swiss franc rallied hard after the announcement as USD/CHF dropped by 300 pips on Wednesday’s session. If price breaks 0.9545, a double top will be in place. The target for the double top will be 0.9050. Watch this week to see if USD/CHF breaks the neckline of the pattern and continues its way towards the target.



BOE


The Bank of England hiked rates by 25bps, as expected, despite raising the inflation forecast to 11% in October and 9% over the next few months. You may be asking yourself why the BOE only hiked 25bps while the Fed is hiking 75bps. The answer is that board members have been consistently worried about the effect that higher interest rates will have on household incomes. Earlier in the week, GDP, Manufacturing Production, Industrial Production and the Claimant Count were all worse than expected. Therefore, the BOE does indeed have something to worry about. In addition, rather than expand by 0.1% this quarter, the BOE now sees GDP contracting by -0.3%. However, the statement did note that the BOE will act forcefully if necessary. On Friday, BOE’s Pill said that if price pressures are becoming embedded, it would be a trigger for more aggressive hikes. GBP/USD sold off aggressively earlier last week, from 1.2315 down to 1.1933, only to bounce after the announcement and close the week near 1.2200. Watch for continued volatility in the pair this week as the UK releases inflation data and Retail Sales for May!


BOJ


After the SNB hiked rates by 50bps while in negative territory, there was hope that the BOJ may do the same late last week. As USD/CHF was falling 300 pips, USD/JPY was falling as well. However, it was not meant to be and after the announcement, USD/JPY bounced and retraced all of Wednesday’s selloff. The BOJ left rates unchanged at -0.1% and reiterated that it will continue to defend the cap on the 10-year JGB at 0.25%. In addition, the statement indicated that the impact on foreign exchange and the financial markets will be watched (more verbal intervention). It also said that it will take additional easing steps as needed. This is completely opposite of almost all other central banks. Therefore, the Bank of Japan doesn’t sound like it has any intention of raising rates anytime soon. Watch Yen pairs to see if they continue to move higher this week on the back on interest rate differentials.



Powell


Fed Chairman Powell will testify in his semi-annual meeting with the Senate Banking Committee on Wednesday. Listen for Powell to clarify any of his remarks during the press conference or in the FOMC statement. If Powell is hawkish and delivers remarks that suggest that the FOMC may hike rates by 75bps at the July meeting, watch for stocks to continue to fall on recession worries. However, if he is less hawkish and sounds like the Committee may only hike 50bps, watch for the stocks to move higher.


Economic Data


Last week, we saw a lot of economic data released worse than expected. This week is a bit quieter on the economic data front. However, as mentioned earlier, the UK will release both inflation data and Retail Sales for May, Germany will release its ifo business climate, and the US will release its remaining May housing data, including existing home sales and new home sales. In addition, traders will get their first look at Manufacturing and Services PMIs for June. Other major economic data releases this week are as follows:


Monday

New Zealand: NZ PSI (MAY)

Australia: RBA Governor Lowe Speech

China: Loan Prime Rate 1 year

China: Loan Prime Rate 5 year (JUN)

Germany: PPI (MAY)

Tuesday

Australia: RBA Governor Lowe Speech

Australia: RBA Meeting Minutes

Canada: Retail Sales (APR)

Canada: New Housing Price Index (MAY)

US: Existing Home Sales (MAY)

Wednesday

New Zealand: Westpac Consumer Confidence (Q2)

New Zealand: Trade Balance (MAY)

Japan: BOJ Monetary Policy Minutes

UK: Inflation data (MAY)

Canada: CPI (MAY)

EU: Consumer Confidence Flash (JUN)

US: Fed Chairman Powell Testimony

Crude Inventories

Thursday

Global: Manufacturing and Services Flash PMIs (JUN)

Mexico: Mid-month Inflation Rate (JUN)

Turkey: TCMB Interest Rate Decision

US: Current Account (Q1)

Kansas City Manufacturing Index (JUN)

Mexico: Interest Rate Decision

US: Fed Bank Stress Test Results

Friday

Japan: CPI (MAY)

UK: Retail Sales (MAY)

Germany: Ifo Business Climate (JUN)

Australia: RBA Governor Lowe Speech

Canada: Manufacturing Sales Prel (MAY)

US: New Home Sales (MAY)

US: Michigan Consumer Sentiment Final (JUN)