BoE Not Done Fighting Inflation

Market movers today

The US releases consumer confidence from University of Michigan for May, where the most interesting part is the inflation expectations. They rebounded in April and are still at a quite high level for the Fed’s comfort. If they resume the downward trend from the earlier this year it will likely be supportive for bonds and equities.

Focus is also on US debt talks, where there seems to be some progress, as well as the news on the US banking sector.

In the Nordics, Norway releases Q1 GDP and monthly GDP for March.

The 60 second overview

Bank of England. In line with our expectation, the Bank of England (BoE) hiked policy rates by 25bp, bringing the Bank Rate to 4.50%. The majority of the Monetary Policy Committee (MPC) voted for an increase of 25bp as they deemed it “important to continue to address the risk of more persistent strength in domestic price and wage setting”. The updated inflation projections showed that the BoE has revised its inflation projections higher across the forecast period, now expecting inflation to reach its 2% target in 2025, a year later than previously expected. EUR/GBP initially moved slightly lower but fully retraced the move during the press conference ending the day above 0.87. With both growth and domestic inflation having surprised to the topside and given BoE’s message today, we pencil in an additional 25bp hike in June 2023, bringing the terminal rate up to 4.75%, Bank of England Review – A data dependent approach, 11 May.

Markets: Markets were generally in a risk-off mode, which drove demand for safe-havens. European and US equity markets generally closed lower. In the US, there were renewed concerns about the health of the regional banking sector as PacWest shares dropped 23%. The USD broadly appreciated in the G10 space, while oil and gold fell. This morning Asian equity markets are trading mixed.

Norway. We expect that Norwegian mainland GDP was slightly negative in March, suggesting zero growth for Q1 overall. Consumer spending is kept aloft by the consumption of services, while mainland investments have likely started to fall. If our take on this is correct, the situation will be marginally better than what Norges Bank assumed in its monetary policy report in March (minus 0.1% q/q), meaning that it will have a negligible effect on the rate decisions going forward.

Equities: Equities were little changed to lower on Thursday. At least for everything but growth and quality. Big tech was higher with communications and consumer discretionary among the winners. Hence, Nasdaq closed up 0.3% vs S&P 500 -0.2%. Somewhat worrisome is that regional banks have continued to sell off this week, with S&P 1500 regional bank index down another -3% yesterday. This takes regional banks to a new year-low. Futures are a tad higher this morning.

FI: Global bond yields declined on the back of softer US economic data as well as continued uncertainty regarding US regional banking sector and the US debt ceiling. Hence, the risk of recession in the US economy is rising. The bond market rallied from the long end and we saw a bullish flattening of the US Treasury curve and the German Bund curve. 10Y US Treasuries dropped some 5bp, while Bunds dropped 7bp.

FX: EUR/USD declined towards the 1.09 mark on the back of a broad USD appreciation yesterday. In line with our expectation, the Bank of England (BoE) yesterday hiked policy rates by 25bp. EUR/GBP initially moved slightly lower but fully retraced the move during the press conference ending the day above 0.87. Scandies saw renewed headwinds with EUR/NOK breaking above 11.60 and EUR/SEK close to the 11.30 mark.