Some of the big beasts of the central banking world are taking center stage over the next week, as the US Federal Reserve, Bank of England and Reserve Bank of Australia hold policy meetings.
A read on the health of the Chinese economy is also scheduled, while an unprecedented Russian sovereign debt default looms.
Did someone say the dollar?
Here’s a look at the upcoming week in the markets:
The Fed’s increasingly hawkish rhetoric sparked a bad sell-off in the stock and bond markets, and on Wednesday we’ll see how aggressively the central bank plans to beat it over the coming months.
The Fed announced a 50 basis point rate hike on May 4, and investors expect 240 basis points of monetary tightening in 2022. Many believe the Fed will continue to surprise the hawkish side, as it struggles to curb the worst inflation in four decades.
Markets will also focus on the Fed’s plans for its roughly $9 trillion balance sheet, which it could begin to unravel as early as May.
four in a row
The Bank of England meeting, a day after the Fed, is expected to raise interest rates for the fourth time in a row, the first time it would have done so since 1997.
BoE chief Andrew Bailey says the bank is walking a “very narrow line” between curbing inflation, which is 7% more than three times its target, and avoiding a recession.
Raising a quarter point to 1% would satisfy a prerequisite for the Bank of England to start selling the bonds it holds. The big question for the markets is when will these sales start? Estimates range from June to 2023.
Active bond sales may tighten monetary conditions but may hurt the ailing economy and no major central bank has started this process yet.
April is said to be the toughest month, and it sure was for anyone on the wrong side of dollar trading.
A 5% rise in the dollar index, driven by safe haven flows and a hawkish Federal Reserve, led to significant declines in the euro and yen, as well as emerging market currencies, led by the yuan.
These moves are tightening global financial conditions, which could slow economic growth. Companies in Japan, Germany and elsewhere face higher import costs for dollar-priced materials and components.
Some of the previous Fed tightening cycles weakened the US currency once it started. But this time, comparisons are made with 1994 when a 300 basis point increase in prices lifted the dollar index 4.6% (after a 10.5% jump in 1993). These moves have been blamed for subsequent waves of emerging market crises.
From China to Australia
The yuan has fallen 4% this month and could fall further if weekend data shows Chinese factory activity continues to weaken.
Beijing, for now at least, appears to be viewing the yuan as its main policy lever, disappointing stock markets that had hoped for clearer government aid or an relaxation of harsh COVID lockdown rules.
The Chinese slowdown also applied a discount in the quarry – which has sent the Australian dollar down about 4.5% through April.
With recent data showing Australian first-quarter inflation at a 20-year high, expectations are growing that the walking cycle may begin as soon as Tuesday.
Swap rates and many economists believe a 15 basis point rate hike is a possibility.
Gas and assumption
Moscow has increased its stance in its confrontation with Western capitals over payments for gas shipments. It cut off gas from Poland and Bulgaria after they refused to accept its demand to pay in rubles instead of in euros.
The European Commission has warned that ruble payments could breach sanctions, but officials are still struggling to clarify the EU’s position on the payments scheme in Moscow.
The elephant in the room is Germany – Russian gas makes up about a third of its total gas use, so the economy could slip into recession if supplies are cut off.
Meanwhile, the clock is ticking on Russia to make a payment on its sovereign bonds that were due on April 4. Failure to pay within the 30-day grace period will cause her to default.
Be smart with your money. Get the latest investment insights delivered straight to your inbox three times a week, with Globe Investor’s newsletter. Register today.