Les banques centrales du G7 vont-elles « chasser » l'inflation ? Le destin de la « moitié du monde » de l'économie mondiale se joue dans ces trois jours !

Finance China April 27 - (Editor: Xiao Xiang) The central bankers of the United States and other G7 countries may keep interest rates unchanged this week, while closely monitoring signs that rising energy costs could trigger inflation.

This week, major central banks including the US, Europe, Japan, the UK, and Canada will sequentially announce their interest rate decisions. This constitutes a rare “Super Central Bank Week” in the global financial markets — G7 central banks will act collectively, with these decision-makers, who hold about half of the world’s economic power, setting the tone for future monetary policy.

Although investors generally expect each central bank to maintain interest rates, markets will closely watch officials, including Federal Reserve Chair Powell and European Central Bank President Lagarde, to see if they express concern about inflation threats — threats stemming from the largest oil supply disruptions in history caused by the US-Iran conflict.

Any signs of concern and speculation about tightening policies in the coming months could be bearish for government bonds. As traders shift their focus away from war, stocks and credit markets have recently strengthened, while government bonds have lagged behind other assets.

According to the schedule, the Bank of Japan will be the first to announce on Tuesday, followed by the Federal Reserve and Bank of Canada on Wednesday, with the European Central Bank and Bank of England “closing” on Thursday.

Amy Xie Patrick is one of the institutional investors actively preparing for this unusually busy “Super Central Bank Week.” She assists in managing a dynamic income strategy at Pendal Group, which has outperformed 91% of its peers over the past five years.

“Do hawkish statements from central bank governors now cause any damage?” Xie Patrick, who has exited all duration risk exposures this month, said, “There is an oil shock. The inflation outlook is also uncertain. Bonds should have reversed with stocks, but until the situation becomes clearer, yields have been stuck in a deadlock.”

Notably, despite some major global assets returning to pre-war levels or higher, short-term bond yields from the US to the UK remain high. Traders attempting to profit from bond volatility are mostly disappointed — so far this month, the daily volatility of 1-3 year US Treasury yields has been about 2 basis points, lower than March’s 4 basis points.

With the arrival of Super Week, Stephen Miller, former head of Australian fixed income at BlackRock, said this situation might change in the coming week.

Central bankers are vigilantly preventing a resurgence of inflation pressures, fearing a repeat of the pandemic period when inflation was viewed as a “temporary phenomenon” — a lesson that likely keeps policymakers cautious, even as concerns about economic growth intensify.

“Central bank comments could trigger bond shorts, pushing yields higher,” said Miller, now a GSFM advisor. “Bond traders might be surprised at how much attention inflation issues are receiving.”

Will major central banks prevent inflation?

For example, in the UK, officials have said that the US-Iran war will exacerbate price increases. In March, the UK Consumer Price Index rose 3.3% year-on-year, above the previous month’s 3%, reflecting a sharp rise in gasoline prices.

Following this, during last week, the market’s expectation for the Bank of England to raise interest rates this year increased from just once to at least twice.

As for the US, Federal Reserve officials have warned that the conflict could further push inflation higher, even forcing the Fed to consider rate hikes, while emphasizing uncertainty about how long oil prices will stay high.

Amid conflicting messages from the US-Iran conflict, the overall macro backdrop makes it difficult for bond investors to price in a higher likelihood of rate cuts later this year until the oil shock situation clarifies. Meanwhile, employment and retail sales data remain resilient, indicating economic robustness.

Over the past week, US Treasury yields have remained within a narrow range, with the market’s probability of rate cuts by the end of the year fluctuating between 25% and 60%. Macro strategist Mark Cranfield said, “Investors will look for explanations from central bank officials on why more time is needed to assess inflation pressures from the Iran war, while weighing the relationship between this and the risk of economic slowdown.”

TD Securities US interest rate strategist Molly Brooks expects that, given the uncertain impact of Middle East tensions, Powell may adopt a “neutral stance.” The Fed will acknowledge “recent inflation increases caused by oil shocks” in its statement, while noting that “core inflation has only risen slightly.”

Brooks said the firm expects the 10-year US Treasury yield to “continue fluctuating within the 4.1% to 4.4% range,” given the uncertainty ahead and the lack of forward guidance from the Fed.

In other regions, Bank of Japan Governor Ueda Kazuo may emphasize the need to assess upside and downside risks to core inflation. Evercore ISI strategists predict that the Bank of Japan will attempt to adopt a “hawkish hold” stance, paving the way for rate hikes in June and December.

European Central Bank President Lagarde, in a recent speech, also emphasized increased uncertainty, and may reiterate this message on Thursday. According to swap pricing, markets believe a June rate hike by the ECB is almost certain, with another possible hike in September.

Of course, while concerns about inflation persist in the short term, if rising prices and geopolitical pressures begin to harm demand, markets and central banks may ultimately shift to worry about economic growth. This shift could eventually lower borrowing costs for both policymakers and markets.

“Markets will look for hawkish signals to support current expectations of rate hikes in the Eurozone, UK, Canada, and Japan,” said Wee Khoon Chong, senior Asia-Pacific market strategist at BNY Mellon. “Geopolitical uncertainty and high oil and petrochemical prices pose both inflationary and growth risks. Central banks may signal caution with a hawkish tone but avoid committing to future rate moves.”

(Edited: Wen Jing)