June 17, 2022

Markets Today: Markets go cuckoo as the Swiss clock a half percent hike

The Bank of England rose rate by 25bps and left its options wide open on future moves

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Overview Join the Party

  • BoE hikes 25bp to 1.25%
  • BoE prepared to act ‘forcefully’ if necessary, but keeps options open
  • Swiss National Bank surprised with a 50bp hike
  • Equities lower, S&P500 -3.3%
  • US dollar weaker, DXY -1.3%
  • Coming up: BoJ, US industrial production

“Come on, join The Party. we’re watching you; we think you’ll do.” – Evermore

Equities were sharply lower as yesterdays’ bounce proved fleeting while the US dollar is weaker despite the risk-off backdrop. The Bank of England rose rate by 25bps and left its options wide open on future moves. Meanwhile, the Swiss National Bank surprised with an unexpected 50bp rise to -0.25%.

The S&P500 was 3.6% lower, putting the index 6% lower so far this week. The sell-off was broad based with all sectors in the red, though declines were led by energy and consumer discretionary with consumer staples holding up better than others. The Nasdaq was 4.1% down, and the Dow closed below 30000 for the first time since January 2021. Fewer than 5% of the shares in the S&P500 are trading above their 50-day moving average, the lowest since the initial COVID fears in 2020. European shares were also lower, the Euro Stoxx 50 down 3%.

The BoE rose rates by 25bp for its fifth back-to back rise, taking Bank Rate to 1.25%. That was the overwhelming consensus among analysts, though markets were pricing around 36bp ahead of the meeting, allowing some chance of a larger 50bp move. The vote was split 6-3, with three members preferring a larger 50bp move, the same split as in May. Previous guidance that ‘some degree of tightening may still be appropriate in coming months’ was dropped. Instead, “ the scale, pace and timing of any further increases in Bank Rate will reflect the Committee’s assessment of the economic outlook and inflationary pressures,” and “the committee will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response.” That leaves the Bank’s options wide open. There was no full forecast update at this meeting, though the BoE noted CPI could rise slightly above 11% in October when the new OFGEM energy price cap is introduced.

The shift in guidance and preparedness to act forcefully if necessary was interpreted as hawkish. The pound briefly fell on the 25bp headline, but rallied back quickly with the pound 1.6% higher against the USD on the day. 2yr gilt yields were sharply higher, up 15bp to 2.1%, after briefly rising as high as 2.26%.

Elsewhere, the Swiss National Bank unexpectedly raised interest rates for the first time in 15 years. The SNB raised its benchmark rate 50bp to -0.25. The statement said that “the tighter monetary policy is aimed at preventing inflation from spreading more broadly to goods and services in Switzerland.” And that “it cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future .” The statement also dropped a reference to a “highly valued” franc. CHF is up 3% against the dollar and 1.9% against the euro.

Core yields were higher in Europe as peripheral spreads narrowed. The German 10yr yield was 7bp higher, contrasted against a 7bp decline for the Italian counterpart. Some details about the likely shape of the ECB’s new anti-fragmentation tool have begun to emerge, with any purchases reportedly to be offset by selling other assets to minimise tension with parallel efforts to remove monetary accommodation. Lagarde told finance ministers that the tool may be triggered if bond spreads widen beyond thresholds or if market movements exceed a certain speed.

In contrast, US yields were lower across the curve. The 2yr yield was 10bp lower at 3.09%, back sharply from its high of 3.45% as recently as Tuesday while the 10yr was off 9bps to 3.19%.
The US dollar lost ground against each G10 currencies except the CAD, the DXY down 1.5%. The AUD was 0.6% higher, currently trading around 0.7047 after dipping as low 0.6944 intraday before a broad-based move lower in the dollar. The dollar fell 1.3% against the yen.

Data flow in the US was firmly on the weak side. Housing starts were 14.4% m/m lower in May, with permits dropping 7%, much softer than expected, but the decline, while still noticeable, is less stark on a trend basis following an uptick in the April data. Also on housing, US mortgage rates have continued to move higher. The average 30yr fixed mortgage rose to 5.78%, the highest it’s been since November 2008, and over 50bp higher than rates just last week. Elsewhere, the Philly Fed business outlook indicator disappointed expectations for a small rise, instead falling to -3.3. Initial jobless claims came in at 229k, holding around last week’s 232k read. Those aren’t levels that are flashing alarm bells about a sharp turn in the labour market yet but are noticeably higher than the sub 200k reads seen in March and April.

Australian employment data yesterday showed employment rose 61k in May, beating expectations for a 25k gain. A sharp list in the participation rate meant the unemployment rate remained flat at its post‑1974 low of 3.9%. All in all consistent with a tight labour market and doing nothing to dissuade the RBA from raising rates by another 50bps in July and August (as is NAB’s view). NZ GDP data confirmed that the economy was weak in Q1 , with a 0.2% q/q contraction, not helped by Omicron-related restrictions ahead of a bounce in Q2.

Coming Up

  • The Bank of Japan June meeting is expected to come and go with no change to short or long-term rate targets but dislocation in JGB markets, ramped up efforts to defend the yield curve target and increasing commentary on the weaker yen make it a more interesting meeting than usual. The BoJ is facing a weaker yen and headline inflation above its 2% target for the first time in 7 years, but the rise is driven by fuel and food, and policymakers have signaled they are waiting for wage gains sufficient to sustain at target inflation.
  • NZ gets the BNZ Manufacturing PMI, while Industrial production numbers are out in the US.

Market Prices

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