Ready for more rate hikes and a cut

By Wayne Cole

(Reuters) – A look at the day ahead in Wayne Cole’s European and global markets.

Predictably, it was subdued in Asia, as the US holiday provides a convenient excuse for equities to shore up recent strong gains ahead of a slew of central bank meetings this week. Most indexes are down, with the Nikkei modestly climbing 22% on a 10-week streak to hit 33-year highs.

S&P 500 futures were also flat after rising for five straight weeks, while the NASDAQ posted eight weeks of gains. These rallies are narrowly based, however, with just nine large-cap stocks accounting for 30% of the S&P 500. It’s harder to call the index a “diversified” investment.

Markets are watching US Secretary of State Antony Blinken’s visit to Beijing, though you know expectations are low when it’s newsworthy that a Chinese diplomat has deigned to shake his hand.

Among currencies, the yen’s downtrend remains alive as the euro and dollar both reach new highs, albeit by just a few ticks. Further losses look likely unless and until the Bank of Japan takes another step toward tightening, which many Western analysts see as possible in July. Governor Kazuo Ueda, however, seemed to set the bar high for a decision last week when he said his inflation outlook would have to change “sharply” to warrant a decision.

The week ahead is also stalled by central bank action, led by China on Tuesday, where prime lending rates are expected to be cut by 10 basis points. This could push the rope given that mortgage rates have already come down significantly and lower rates are only undermining the return on household savings. Markets are really waiting for more fiscal stimulus to revive growth, as they have so often done in the past.

Federal Reserve Chairman Jerome Powell appears before lawmakers on Wednesday and Thursday and could again try to convince markets that two more quarter-point rate hikes are really, honestly, likely.

Futures don’t look impressed with just 21 basis points of tightening expected in September, although a final rise in July is seen as a decent 70% chance.

By contrast, markets expect the Bank of England to hike at its Thursday meeting, with the only question being 25 or 50 basis points. Futures are leaning towards the smallest move at 4.75%, but also have rates reaching at least 5.75% given stubborn inflation and soaring wages.

Gilt yields have already reached 15-year highs, wreaking havoc on the UK mortgage market and increasing the government’s already astronomical borrowing costs.

Rate hikes are also expected in Norway and Switzerland this week, possibly by 50 basis points, although that is likely to pale in comparison to Turkey’s central bank as some analysts see rates rise from the current 8% to 25%.

Key developments that could influence markets on Monday:

– Isabel Schnabel, Member of the Executive Board of the ECB, Luis de Guindos, Vice-President of the ECB, and Philip Lane, Chief Economist of the ECB, all take the floor.

– U.S. stock and bond markets are closed, while the NAHB housing market index for June is due

(By Wayne Cole; Editing by Sam Holmes)

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