Stocks were trading in a pretty muted fashion early Monday ahead of a spate of central bank decisions due this week. European indices traded mildly higher and US futures were firmer after the S&P 500 and Nasdaq saw their first back-to-back weekly losses since October; yields rising last week sharply on higher-than-anticipated inflation data. The 10-year Treasury is north of 4.3 per cent and gold has trimmed its advance to all-time highs, back about $50 (£39) from its all-time-high to around $2,145. The dollar was broadly flat at 103 on DXY. Bitcoin is about 8 per cent below last week’s record high.
All eyes on Tokyo: The Bank of Japan (BoJ) decision tomorrow morning could see the first hike since 2007. The conclusion of ‘shunto’ wage negotiations in Japan has seen the biggest pay rises in about three decades, with average gains of 5.28 per cent being reported, paving the way for the BoJ to end its negative rates policy. "The outcome of this year's annual wage negotiation is critical” to deciding on when the BoJ should exit negative rates, Governor Kazuo Ueda told parliament last week.
More of the same from the Federal Reserve – a hold – but the focus will be on the updated dot plot and economic projections. A fresh dot plot will tell us a lot about how cautious members have become in recent weeks. Even if the hotter-than-expected inflation numbers last week haven’t drastically altered the expectations for June – there is a lot of time between now and then – it could have an important impact on FOMC members’ projections for core PCE inflation and their views on cuts for the year.
It’s more complicated than inflation data may suggest – the Fed is about to commit to accepting permanently higher inflation. ISM employment components are in contraction, the NFIB survey suggests hiring by small firms is the weakest since May 2020 and the job quits rate has slowed a lot. Plus, there are a lot of well-publicised layoffs among large employers.
The Bank of England (BoE) is also seen on pause and is about 50-50 on a cut in June. No change is expected on Thursday but the BoE expects inflation to fall to 2 per cent in the next couple of months, leaving the path clear for the MPC to move more swiftly towards cutting rates than some peers. Or maybe not – inflation is seen falling to 2 per cent but then picking back up to 3 per cent later in the year. Bank of England Governor Andrew Bailey said that the UK is “near or at full employment” and seems less worried about a wage-price spiral. Wage growth has come down, too, as a cooler jobs report saw traders bring forward expectations for the BoE to cut in June from August.
Sterling has had a good run this year, testing $1.29 before pulling back on renewed USD buying.
The Trader is written by Neil Wilson, chief market analyst at Finalto
