Steep Rate Hikes On The Horizon

Thoughts Of The Week

Steep Rate Hikes On The Horizon

Several central banks are bringing forward their interest rate hiking timetables. Norway has signalled it expects to raise rates four times by mid-2022, with a hike likely in September. A rapidly recovering economy is the main reason for this as well as house price inflation. Canada has indicated its key rate could rise in the second half of 2022. The US Federal Reserve is shutting down its pandemic-era stimulus with officials moving their first rate hike projections to 2023 (from 2024) making two for that year, revising up its inflation target while taper-talk is hotting up and is likely to start in the coming weeks.

All this is causing a flattening in the yield curve (where the difference between long-term and short-term yields decreases), driving up yields on the 2-year note while the longer end fell as risk-off ensued.

So what’s caused the recent fall in bond yields (i.e. gain in bond prices) given all the above as well as rising inflation in the global economy? One argument is US Federal Reserve communication has been very effective and there are many investors who swear by it. Another factor cited is the Fed running down its $1.6trn Treasury General Account. This has flooded the money markets with US Bank Reserves and starved them of new Treasury bill sales, pinning short-term interest rates to zero.

Trade Deal Agreed Between UK & Australia

The UK and Australia have agreed a trade deal. It is the first such deal the UK has negotiated from scratch upon leaving the EU. A deal with New Zealand could also be attainable by August. These deals might speed up the UK’s application to join the trans-Pacific trading bloc, which Australia and New Zealand are both part of. The UK economy is forecast to grow over 8% this year. With exports to the EU down roughly 7% to date vs pre-Brexit, these trade deals could help the UK make up lost ground.

The Week That Was…

Inflation Watch‍

In the UK, May inflation hit 2.1% y/y (April: 1.5% y/y), rising above the BoE’s target of 2%.

Inflation also rose to 2% in the Eurozone (April: 1.6% y/y) with energy the key driver again rising 13.1% y/y (April: 10.4%).

In Canada inflation for May was up to 3.6%, against a Bank of Canada target of 2%, while in Saudi Arabia it rose to 5.7%.