Will the G7 central banks "hunt down" inflation? The fate of the "half of the world's economy" hangs in the balance over these three days!

Financial Associated Press, April 27 (Editor: Xiao Xiang)
Central bankers from the US 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 decision-makers controlling about half of the world’s economy setting the tone for future monetary policy.

Although investors generally expect each central bank to hold rates steady, markets will pay close attention to whether officials, including Federal Reserve Chair Powell and European Central Bank President Lagarde, express concerns about inflation threats—risks 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 the war, stocks and credit markets have recently strengthened, while government bonds have lagged behind other assets.

Looking at 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 wrapping up 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 come at a cost?” 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 remain 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 elevated. 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 Australia fixed income at BlackRock, said this situation might change in the coming week.

Central bankers are on high alert against a resurgence of inflationary pressures, fearing a repeat of the pandemic-era view that inflation was “transitory”—a lesson that caught many off guard when inflation proved stubborn. This likely keeps policymakers cautious, even as concerns about economic growth grow.

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

Will major central banks tighten inflation?

Take the UK as an example: UK officials have said that the US-Iran war will exacerbate price increases. In March, the UK Consumer Price Index rose 3.3% year-over-year, up from 3% the previous month, reflecting a sharp rise in gasoline prices.

Following this, during last week, market expectations for UK rate hikes this year increased from just one to at least two.

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 market expectations for rate cuts by the Fed before year-end fluctuating between 25% and 60%. Macro strategist Mark Cranfield said, “Investors will be looking for explanations from central bank officials on why more time is needed to assess inflationary pressures from the Iran war, while weighing the relationship between this and the risk of economic slowdown in the medium term.”

TD Securities US interest rate strategist Molly Brooks expects that, given the uncertainty about the future impact of Middle East tensions, Powell may adopt a “neutral stance.” The Fed will acknowledge in its statement that “recent inflation increases due to oil price shocks,” 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 highlighted increased uncertainty and may reiterate this message on Thursday. According to swap pricing, markets largely expect a rate hike in June, with possibly another 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. Such a 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 uncertainties and high oil and petrochemical prices pose both inflationary and growth risks. Central banks may convey a cautious hawkish tone but avoid committing to future rate moves.”

(Edited by: Wen Jing)