Earlier this week, we suspected that the publication of the minutes of the Fed and ECB meetings would emphasize the central banks’ focus on limiting the inflationary risk, even though the economic outlook was weakening at the same time. The FOMC minutes confirmed this impression last night, and the minutes of the ECB meeting, which will be released today at noon, should leave the same impression. But how strongly is this message reaching investors? The market reaction to the release of the FOMC protocol was mixed at best and did not give the impression that the topic of “concerns about inflation and interest rate hikes” could allay fears of recession in the short term. So today is the second opportunity to publish the “ECB Account”, as the protocol is called, in the language of the central bank.
Two issues with opposing forces in the bond markets dominate the discussion in the financial markets:Concerns about inflation and concerns about an interest rate hike‘for one and’fears of recession“On the other hand. The first topic determined trade activity in large sections of the first half of the year. The result was huge increases in yields, reaching even 200 bp in the Bund market and up to 280 bp in the US Treasury securities market. From mid-June, which coincided with the last FOMC meeting. , concerns about inflation subsided, expectations as to the scale of interest rate hikes were reduced by up to 100 bp, and yields dropped significantly.
In fact, both inflation and recession are very topical. Initially, we assumed that “inflation concerns” would continue to dominate trade in the third quarter, amid rising expectations of interest rate hikes and rising yields. For the time being, however, it does not appear that concerns about inflation outweigh concerns about recession.
Both the FOMC meeting in mid-June and the ECB meeting a week earlier made a hawkish impression on investors. It became clear (and this was confirmed a few days later at the ECB conference in Sintra) that central banks will subordinate their growth targets to the fight against inflation. The publication of central bank minutes this week could have been an impulse to give new impetus to expectations for interest rate hikes. They were last night FOMC minutes complex. The content, as expected, was hawks. True, US Treasury yields rose after the release, and money markets priced in an additional 10bps of interest rate hikes by the Fed this year. At the same time, however, equity markets were more stable and we generally did not feel that the topic of “inflation concern” was gaining importance. This impression was confirmed this morning. The US bond market is initially stable with equity markets continuing to recover. Yesterday’s photo could repeat itself this afternoon: This ECB minutes will be released at 1.30pm, investors will say “that sounds very hawk” – but they will also say “that was four weeks ago, a lot has happened in the meantime …”.
If concerns about inflation do not outweigh fears of a recession today or in the days and weeks to come, there would be significant repercussions for the economy as a whole. Perspective of a steady income. In such a scenario, yields would probably not return to their mid-June highs, which in turn means that we have already seen yield peaks in the current hike cycle. The fact that the Fed has already priced in about 50 basis points of interest rate cuts for the coming year also counteracts a strong resurgence in government bond yields. This is initially just a scenario of how the bond market might or might not develop in the coming weeks. However, the likelihood of this scenario has increased in the past few days. And it will continue to grow if “inflation fears” do not use their “match ball” today …
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The match ball of the contribution to “concern for inflation” appeared for the first time on the blog onemarkets (HypoVereinsbank – UniCredit Bank AG).