Week Ahead – ECB Rate Decision; US Inflation Rate and FED policy rate hike

European stocks are taking hit on expectations of a tightening monetary policy in the ECB rate decision on Thursday. The STOXX 600 Index fell with the FTSE 100 and sterling after UK Prime Minister Boris Johnson survived a no-confidence vote on Monday. The win by a simple majority of 211 Vs. 148 has weakened the position of the man who led the Conservatives to a landslide election victory in 2019. Whereas, bullish sentiment in the US stock market on the back of easing COVID restrictions in China, reports that US President Joe Biden may roll back some Chinese tariffs, as well as better than expected services data and fading amid the persistent outlook for aggressive US monetary policy.

WEEK AHEAD OVERVIEW:

• On Wednesday, UK construction PMI figures were released.
• US crude oil inventories are published on Wednesday.
• On Thursday, the ECB will announce its interest rate decision.
• Incoming US inflation data are likely to only show modest signs of disinflation, potentially revitalizing Fed rate hike odds and thus helping the US Dollar.

EUR EUROPEAN CENTRAL BANK RATE DECISION & PRESS CONFERENCE

The gap between the ECB and other major central banks’ rate hike odds that defined much of 2022 continues to close. Rates markets continue to price in the first 10-bps rate hike in July, after the ECB announces an end to its asset purchase program at its June meeting this week. But multi-decade highs in inflation pressures across the Eurozone, rates markets are now discounting a 50-bps rate hike in December 2022, in what would be the largest single-meeting increase in rates since 2000.

USD INFLATION RATE (CPI) (MAY)

US inflation rates will remain obdurately high, even as core rates show signs of disinflation, thanks to ongoing elevation in food and energy prices. According to the survey, the May US inflation rate is due at +8.3% y/y, unchanged from April, while the core inflation rate is expected to subside slightly to +5.9% y/y from +6.2% y/y.

RATE HIKE EXPECTATION FROM THE FED:

While 50-bps rate hikes are priced-in for both June and July, rates markets are slowly coming around to the idea that another 50-bps rate hike will be levied in September, when the Fed meets after the Jackson Hole Economic Policy Symposium. Rates markets are unconvinced that much more tightening will occur thereafter; only 148-bps worth of hikes are priced in through the end of 2022, potentially leaving the US Dollar at a relative disadvantage as other central banks begin to ramp up their fights against multi-decade highs in inflation pressures