Action-packed start

We’re only a few hours into trading on Monday and already it’s been action-packed across the board, setting us up for another blockbuster week.

We’ll start with equity markets which are in freefall as the reality of high inflation, even faster monetary tightening and a cost-of-living crisis really kick in. Investors spent the last couple of weeks of May asking themselves whether the worst is priced in and they very much now have their answer.

We all sensed the change in tone from ECB President Lagarde last week; the central bank is now extremely concerned about inflation and knows it needs to act urgently (by its own standards) and aggressively.

European stocks have been tumbling ever since while European yields have taken off again, with the Italian 10-year today hitting 4% for the first time since early 2014. Almost 10 years after Draghi’s famous “whatever it takes” speech, the ECB has a real job on its hands managing surging yields in the periphery.

BoE could hike faster as the economy slumps

The BoE has been simultaneously raising rates for longer than most while appearing to drag its feet, and trying not to damage the economy while throwing in the towel when it comes to an impending recession. Which has left many to wonder what exactly it is doing on all fronts and asking whether crossing your fingers and hoping for the best is an adequate policy approach.

The data this morning showed the economy unexpectedly contracted in April, meaning the recession later this year could arrive sooner than feared. The cost-of-living crisis has well and truly arrived and I don’t think the data is going to improve for the foreseeable future with households and businesses seeing rising costs around every corner. The meeting on Thursday is expected to produce another 25 basis point hike, although there is a growing number expecting the MPC to join the super-sized club before inflation hits double figures.

BoJ has a big problem on its hands

If you think the only central banks having a hard time right now are those facing runaway inflation, you’re very much mistaken. The BoJ is desperately trying to cling on to its yield curve control tool in an attempt to deliver on its elusive 2% inflation target but it’s very much losing the battle and at great cost to the currency.

The yen is marginally higher on the day against the dollar after hitting a 24-year low earlier in the session. Officials are keeping quiet on the question of FX intervention but the central bank has a problem of its own. Despite conducting the largest fixed-rate bond purchase since 2018 overnight, the 10-year yield has smashed through the 0.25% barrier. The BoJ meeting later this week has just become infinitely more intriguing, the only problem being I’m not sure they can wait that long if JGB purchases are failing.

USD 20,000 suddenly looking very vulnerable

Bitcoin has plunged at the start of the week, falling to its lowest level since late 2020 and the worst may still lie ahead. Market conditions were already far from optimal – severe risk aversion and higher interest rate expectations – but throw in a major crypto lender freezing withdrawals and it really is the perfect storm. Confidence has already been shaken in the crypto market this year by the Terra debacle and this is another massive blow. Suddenly USD 20,000 is looking extremely vulnerable.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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