Rates markets prepare for recession as yields curves inverted further this week. With a hawkish tilt to central bank decisions this week, Bank of Japan (BoJ) continues to stand in stark contrast supported by several dovish messages from BoJ, leaving yen as one of the big losers in FX markets. Scandi currencies have also seen some headwinds with EUR/SEK hitting the highest level ever. European yields moved lower as PMI data ticked in significantly weaker than expected, with service sector growth easing and further weakness in manufacturing. Oil and energy in general took a leg lower following the weak PMIs and as the US inventory report showed continued selling of strategic oil reserves.
Another key market events this week was Fed chair Powell’s semi-annual testimony in the House Financial Services Committee. Powell said, it might make sense to hike further at a more moderate pace; nothing new compared to last week’s FOMC meeting. Fed pricing was little changed and markets price in one additional hike this year. We still think this hiking cycle is done.
Thursday brought a flurry of rate hikes, with hawkish surprises from Norges Bank and Bank of England, both hiking by 50 bps. While expectations were split between a 25 and 50 bps hike for the former, the latter was a big surprise with 31 bps priced in ahead of the meeting. Both decisions come on the back of further surge in inflation in May. FX markets strengthened Sterling on announcement but quickly reversed the move and rates curves inverted further. As expected, the Turkish central bank U-turned as the new governor Erkan hiked the key interest rate by 650 basis points to 15%. Analyst expectations were dispersed to say the least. That said, the hike was significantly smaller than priced in by markets, and the lira tumbled to new lows despite a promise to tighten further.
We have published a new Nordic Outlook this week. The news have mostly been good in recent months when it comes to inflation, employment and the near-term growth outlook in most major economies. However, we have yet to see the full effect of the monetary and fiscal tightening that has already happened, and inflation is still not sufficiently under control. We expect prolonged slowdown and moderately higher unemployment, with the risk of a deeper recession still present. This is also true in the Nordic countries, even though the outcome so far has surprised positively in Denmark and Sweden.
Next week, focus turns back to inflation data, as euro area figures are released Friday. We expect headline inflation continued to slide rapidly to 5.3% from 6.0% in May. Core inflation on the other hand is stickier and we forecast a small decline from 5.3 to 5.1%. We will also keep an eye on ECB president Lagarde’s speech at Sintra. In the US, May PCE data will be in focus along with Powell, who is scheduled to speak again Wednesday.
In China, focus will be on whether we get any concrete announcements on new stimulus. We also get the official PMI release for June, look for a small lift to the manufacturing PMI and further moderation in the service PMI from still high levels.
 continues to stand in stark contrast supported by several dovish messages from BoJ, leaving yen as one of the big losers in FX markets. Scandi currencies have also seen some headwinds with EUR/SEK hitting the highest level ever. European yields moved lower as PMI data ticked in significantly weaker than expected, with service sector growth easing and further weakness in manufacturing. Oil and energy in general took a leg lower following the weak PMIs and as the US inventory report showed continued selling of strategic oil reserves.){kind=link}