In our March Central Bank Watcher we stated that bond markets had more eye for the 'flation' than the 'stag' side of stagflation, as they absorbed recent shocks related to the war in Ukraine and ongoing supply chain disruptions. This emphasis of concern persisted for most of March and April, but a shift in focus has recently become apparent. Pricing of Fed rate expectations, for instance, had been moving at an ever-accelerating pace but has now stabilized, after some push back from Fed chair Powell. Another example comes from the Bank of England, whose May rate hike was smaller than expected and was accompanied by a warning that the UK economy could slide into a recession. To be sure, the attentiveness to ‘flation’ has not faded, but growth risks are clearly in focus as well.
That shift in emphasis is evident mainly in markets where central banks have already started hiking rates. In the Eurozone, where net QE has not yet ended, the debate is now adjusting toward evaluating an earlier start to the ECB hiking cycle. Who knows how long the window of opportunity for hike rates will remain open.
Rate hikes also look unavoidable for many Asian countries – but not for the PBoC and BoJ. There we expect the continued pressure to ease (PBoC) or for the stance of unchanged policy to be maintained (BoJ), reflecting economic challenges and much more modest inflationary pressures.
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