Eurozone makes hawkish pivot on bonds
07-02-2022
George Lucas, Raiz Group CEO
Last week saw the Bank of England hike its main interest rate for the second time in a row while the European Central Bank indicated a hawkish shift in policy. The moves reinforce the view that yields of long-dated government bonds in the UK and eurozone will rise over the next two years.
What’s more, the increasingly aggressive stances also suggest there is a risk that moves in 10-year yields for Europe may be larger, and closer to the rises we have seen in the US, which is not priced in by the market.
The BoE and the ECB followed in the footsteps of the US Federal Reserve and the Reserve Bank of Australia in signalling that monetary tightening may proceed faster this year than the banks themselves had previously indicated.
Indeed, ECB president Christine Lagarde’s hawkish messaging to media opened the door to eurozone rate hikes starting this year, although the bank’s monetary policy statement was less dramatic.
Similarly, in the UK, while the BoE’s decision to raise rates and start reversing quantitative easing were broadly expected, four monetary policy committee members voted for a larger hike. This suggests that the central bank is stepping up its fight against inflation, and as a result the market is expecting more hikes, potentially another 100 basis points by year end.
RBA wraps up bond buying
In Australia, early last week saw the RBA end its bond purchases, revise up its inflation forecasts and remove its signal that wage growth needs to be “materially higher” to meet its inflation target on a sustained basis. Following on from this, my best guess is an initial rate hike in August.
Also, it’s worth noting that the RBA made it clear that the Omicron outbreak had not derailed the recovery, although the central bank did revise down its 2022 and 2023 growth forecasts.
Unfortunately, the RBA is also expecting higher inflation, potentially climbing from 2.6 per cent in Q4 to 3.25 per cent in the coming quarters. So this is a major change in course for the RBA, not a blip.
US payrolls surge in January
In the US, jobs data for January showed a 467,000 gain in non-farm payrolls. This was a strong number, as it came despite the spike in self-imposed isolation driven by the Omicron wave.
The bullish jobs figures will further fuel expectations of the Fed unleashing a 50 basis-point hike in March. However, I actually think this is unlikely as a slowdown in Q1 GDP growth will likely persuade officials to start slowly. But once they start hiking, they will continue regularly.
Interesting fact – in the past it has generally been the case that US equities will underperform those in the rest of the developed world when Fed is tightening, probably because of strength in the US dollar.
This has been the usual pattern since the 1970s in Fed tightening cycles. Complicating matters is that the only notable exception was the last most recent cycle in the 2010s, so we will just need to wait and see.
Supply chain issues ease in Asia
Turning to Asia, there are signs that supply chain problems, linked to COVID-19, are improving in emerging Asia such as Thailand and Malaysia and Indonesia.
Looking ahead, this coming week we will see Q4 GDP figures for Indonesia and Malaysia, and they will likely show output rebounded strongly. We are also set to see Thailand and Indonesia central banks leave interest rates unchanged at scheduled policy meetings. However they will be wary of a rising US dollar affecting their currency reserves.
Don’t have the Raiz App?
Download it for free in the App store or the Webapp below:
Important Information
If you have read all or any part of our email, website, or communication then you need to know that this is factual information and general advice only. This means it does not consider any person’s particular financial objectives, financial situation, or financial needs. If you are an investor, you should consult a licensed adviser before acting on any information to fully understand the benefits and risk associated with the product. This is your call but that is what you should do.
You may be surprised to learn that RAIZ Invest Australia Limited (ABN 26 604 402 815) (Raiz), an authorised representative AFSL 434776 prepared this information.
We are not allowed, and have not prepared this information to offer financial product advice or a recommendation in relation to any investments or securities. If we did give you personal advice, which we did not, then the use of the Raiz App would be a lot more expensive than the current pricing – sorry but true. You therefore should not rely on this information to make investment decisions, because it was not about you for once, and unfortunately, we cannot advise you on who or what you can rely on – again sorry.
A Product Disclosure Statement (PDS) for Raiz Invest and/or Raiz Invest Super is available on the Raiz Invest website and App. A person must read and consider the PDS before deciding whether, or not, to acquire and/or continue to hold interests in the financial product. We know and ASIC research shows that you probably won’t, but we want you to, and we encourage you to read the PDS so you know exactly what the product does, its risks and costs. If you don’t read the PDS, it’s a bit like flying blind. Probably not a good idea.
The risks and fees for investing are fully set out in the PDS and include the risks that would ordinarily apply to investing. You should note, as illustrated by the global financial crisis of 2008, that sometimes not even professionals in the financial services sector understand the ordinary risks of investing – because by their nature many risks are unknown – but you still need to give it a go and try to understand the risks set out in the PDS.
Any returns shown or implied are not forecasts and are not reliable guides or predictors of future performance. Those of you who cannot afford financial advice may be considering ignoring this statement, but please don’t, it is so true.
Under no circumstance is the information to be used by, or presented to, a person for the purposes of deciding about investing in Raiz Invest or Raiz Invest Super.
This information may be based on assumptions or market conditions which change without notice and have not been independently verified. Basically, this says nothing stays the same for long in financial markets (or even in life for that matter) and we are sorry. We try, but we can’t promise that the information is accurate, or stays accurate.
Any opinions or information expressed are subject to change without notice; that’s just the way we roll.
The bundll and superbundll products are provided by FlexiCards Australia Pty Ltd ABN 31 099 651 877 Australian credit licence number 247415. Bundll, snooze and superbundll are trademarks of Flexirent Capital Pty Ltd, a subsidiary of FlexiGroup Limited. Lots of names, which basically you aren’t allowed to reproduce without their permission and we need to include here.
Mastercard is a registered trademark and the circles design is a trademark of Mastercard International Incorporated.
Home loans are subject to approval from the lending institution and Raiz Home Ownership makes no warranties as to the success of an application until all relevant information has been provided.
Raiz Home Ownership Pty Ltd (ABN 14 645 876 937), an Australian Credit Representative number 528594 under Australian Credit Licence number 387025. Raiz Home Ownership Pty Ltd is 100% owned by Raiz Invest Australia Limited (ABN 26 604 402 815).
