Federal Chair Powell said policymakers expect interest rates will need to move higher to slow down growth and contain price pressures. Markets are pricing about a 75% chance of a 25bps rate hike at the July meeting. UK inflation continues to run hot

Global equities are a bit weaker overnight although the S&P has managed to rebound off the session lows to be close to unchanged. European equities fell with more notable losses in Asia. European bond yields are higher and US Treasury yields are little changed. The US Dollar is generally weaker.

Asian equities lost ground ahead of holidays in Hong Kong and mainland China with the policy response by the PBOC to the tepid economic recovery viewed as inadequate. Chinese policy makers are facing increasing calls for greater economic stimulus with several prominent state media outlets and government advisors suggesting the Central Bank will ease monetary policy further following the rate cut last week.

Federal Reserve Chair Powell delivered his semi-annual congressional testimony before the House Financial Services Committee overnight which did not offer much new information. He said policymakers expect interest rates will need to move higher to slow down growth and contain price pressures.  This comes after the decision to leave rates on hold last week at the June FOMC but signal that two additional rate increases were likely later in the year. Markets are pricing about a 75% chance of a 25bps rate hike at the July meeting which is little changed from levels ahead of Powell’s testimony.

UK inflation printed higher than expected with both the headline and core measures beating consensus expectations for the fourth consecutive month. Core inflation reached a 31-year high of 7.1% in May. This will keep pressure on the Bank of England (BOE) ahead of the monetary policy decision this evening. The BOE has hiked rates at 12 consecutive policy meetings from 0.1% to 4.5%. Overnight interest rate swaps are pricing in an increasing probability that the Bank may hike by 50bps tonight with the terminal rate now priced close to 6%. GBP/USD was not able to maintain the gains from immediately after the release of the inflation report given concerns about the impact on growth from a more aggressive BOE stance. High inflation and interest rates are also impacting public finances with Government debt increasing beyond 100% of GDP for the first time since 1961.

US Treasuries yields moved higher following the UK inflation data. 2-year treasuries peaked up towards 4.75% before retracing lower while the 10-year yield highs were close to 3.79%.  Yields began to fall following Powell’s testimony and market sentiment was supported by a strong 20-Year Treasury auction. European bond yields are higher. 2-year Gilts made fresh highs for the cycle above 5.10% before pulling back but still closed 10bps higher in yield. 10-year Gilts advanced 7bps basis points to 4.40% and 10-year Bunds added 3bps to 2.43% 

In currency markets, the Dollar was generally weaker following Powell’s remarks with EUR/USD moving up towards 1.10, almost a big figure higher than earlier in the session. However, the Yen remains relatively weak with yield differentials continuing to provide a headwind. EUR/JPY has made fresh multi-year highs above 155. The Pound was relatively weak amongst European currencies amid growing concerns about stagflation. NZD/USD moved back above 0.6200 and made ground against the AUD with NZD/AUD trading back towards 0.9140.

NZ fixed income markets couldn’t maintain the opening lower yields in the local session yesterday and steadily traced higher through the day underperforming on a cross market basis to Australia. Bond yields were 2bps higher across the curve with bonds cheapening relative to swaps ahead of NZDM’s weekly bond tender where 2030, 2033 and 2037 maturities are being offered.

Later this evening, the Bank of England monetary policy decision will be in focus. Fed Chair Powell is appearing before lawmakers for the second day running and US Initial Jobless Claims data will be released. The 4-week moving average for Jobless claims reached the highest level since November 2021 at the prior release.