The meeting of the FOMC turned out to be more hawkish than some expected, with the dots shifted and two hikes signalled for 2023 along with fewer asset purchases in 2022.
Although the Fed still sees the current surge in inflation as transient and upgraded growth to 7% for 2021. Reactions to this were strangely mixed, 10-year US Treasury yields had broken through 1.45% on a wave of short covering ahead of the CPI release, which then printed at a chunky 5% YoY, prompting a return to 1.50%. After the meeting we saw a spike to 1.58% followed by a rally to 1.35% in short order, now currently at 1.50%, proving that there were many different interpretations of what their message actually said, and meant. This is the difficult tightrope that the Fed already faces in communicating withdrawal of stimulus without inducing undue volatility or tantrums.
The ECB says it will continue to buy bonds despite forecasting a pickup in Eurozone inflation and growth. Christine Lagarde recently went further saying there was still room to cut rates if needed, I’m not sure how many believed her. The European Commission, who seemed to insert a gate-crasher into the G7 photoshoot alongside their President, (I hope it wasn’t only me who took a while to work out it was the President of the European Council) flexed its muscles by excluding 10 large investment banks from the sale of the first €20 billion issue by the EU’s recovery fund for previous breaches of antitrust rules. These banks included the biggest players in European debt capital markets, they must have plenty of confidence that the remaining second tier has the reach to fund the $1 trillion need for the Next Generation EU pandemic recovery fund.
As UK inflation printed above expectations and above their target of 2%, the Bank of England celebrated 40 years of Index-linked Gilt issuance by coming to market with their biggest linker issue to date, printing £4 billion 2039 paper on a real yield of -2.2448%, more than 7 times oversubscribed. Their inaugural Green Gilt syndications will begin in September. Corporates continued to issue heavily into the primary market in all currencies as credit spreads continue their grind tighter, supported by abundant liquidity. A Private Equity bid for Morrison’s reminded investors of specific risk as their bonds gapped over 150bp wider.