Eurozone makes hawkish pivot on bonds - Raiz Invest

February 7, 2022

Eurozone makes hawkish pivot on bonds

February 7, 2022

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.

 

 


 

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