Top 3 events to move financial markets during the summer
- Central banks' tightening to continue during the summer
- Bank of Japan is in an awkward position
- Higher volatility than usual during the summer
Summer is here, and financial markets’ volatility typically declines significantly. However, this year may be different if we consider the importance of the economic events and central banks’ decisions that lie ahead.
So here are three events worth watching as they will have a huge impact on financial markets (stocks, currencies, bonds, commodities):
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- Fed’s next step after delivering a 75bp rate hike
- ECB’s introduction of a new backstop instrument in July
- BOJ’s next step as the yen keeps falling
Will the Fed deliver another 75bp rate hike in July?
June 15, 2022, will remain down in history as the first time the Fed hiked the interest rate by 75bp since 1994. To some, it appears that the Fed is panicking by hiking more than implied in their forward guidance (the Fed was supposed to hike only by 50bp at the June meeting) and by keeping a similar stance during the summer.
The July meeting will likely bring another 75bp rate hike, providing the CPI or Consumer Price Index continues to surprise to the upside. As such, the US dollar should keep having a bid, while US stocks will have a hard time rebounding.
New anti-fragmentation tool to allow the ECB to hike rates faster
In Europe, the war in Ukraine is having a negative impact on the local economies. The European Central Bank (ECB) has recently announced that it plans to introduce a new backstop instrument at its July meeting, one that could allow it to raise rates faster.
A hawkish ECB tone led to the spreads in the periphery to widen, putting pressure on the central bank to postpone hiking. Yet, inflation is a problem in Europe as the prices of goods and services keep rising.
Hence, the new anti-fragmentation tool to be announced at the July 21 meeting should give the ECB more room to maneuver on its tightening plans.
Pressure mounts on the Bank of Japan
The Bank of Japan (BOJ) remains the only big central bank that keeps monetary policy easy. As the yen approaches 136 against the US dollar, it has lost more than 15% since early March.
The fast-paced depreciation is hurting the Japanese economy, and thus the BOJ may be forced to intervene. However, it does not mean that it will change its yield curve control program.
Instead, it may verbally intervene from time to time only to slow down the yen’s fall. After all, inflation in Japan is nowhere near levels seen in Europe and the United States, and this is the big chance the BOJ has to bring it to levels required in its mandate.