Rising price pressures and central bank responses to bring them back under control remain key for markets and price action. Wednesday’s US CPI print was a case in point last week. The further upside surprise relative to analyst estimates strengthened speculation that the Fed may step up the pace of hiking even further at its next meeting at the end of the month. 100bp rate hike by the world’s most powerful central bank, anyone?

The chances of this went above 80% at one point last week, before pulling back to below 30%. This was also fuelled by the Bank of Canada’s jumbo 100bp hike shortly after the US inflation release. The market response has been a further inversion of the closely watched 2s-10s yield spread in the US, and a clear additional leg up for the US dollar. Indeed, the most traded currency pair broke parity and will be desperately trying to find a bid this week as the ECB meets on Thursday. That said, some see the dollar as topping out as recession fears increase early next year.

All eyes will be on President Lagarde and the ECB’s Governing Council as they raise interest rates for the first time in 11 years, given the inflation backdrop and the ample guidance by officials. Until recently, it had seemed extremely likely too that the bank would wish to follow through with its suggestion that its size would be a quarter point hike. However now, markets are pricing in a reasonable chance of a greater 50bp rise instead, with around 32bps priced in.

Most ECB watchers think this will wait until September, but the stakes are high as the single currency plummets. Perhaps the greatest downside lies in money markets pricing in over 90bps of rate hikes by September. The euro is facing a multitude of headwinds with news around the reopening of the Nord Stream pipeline also worth watching as a major driver of euro assets.

A busy week also includes a bunch of UK data, including the latest job and CPI figures. A notch higher in the unemployment rate and a slight uptick in inflation will not be a surprise to the BoE and may force their hand in joining other major central banks with a 50bp rate hike in August.

The US earnings season continues with results updates from Goldman Sachs, Netflix and Tesla in the coming days. Several US tech companies have announced hiring slowdowns and layoffs in recent weeks, and the difficulties are expected to continue.

Major risk events of the week

19 July 2022, Tuesday:

-UK Jobs: Analysts estimate the unemployment rate holding at 3.8% in June. The labour market is still very tight with 1.3 million vacancies nearly matching the level of unemployed. Many economists predict that the weaker economy in the coming months will result in rising joblessness and wage pressures.

20 July 2022, Wednesday:

–UK CPI: Consensus forecast the headline CPI rising to 9.4% from 9.1%. May’s print was the highest annual rate of price growth since 1982. They expect a marginal decline in the core measure, from the April peak of 6.2% to 5.8%.  Rising fuel prices and the energy outlook is key in determining how sticky inflation may be.

–Canada CPI: Annual inflation accelerated to 7.7% in May, beating forecasts of 7.4% and April’s 6.8%.  The recent BoC statement highlighted the breadth of price pressures, with more than half of the CPI components now rising by more than 5%. The fear is that price pressures are becoming entrenched.

21 July 2022, Thursday:

-Bank of Japan meeting: The market expects the bank to stand pat on its yield curve control policy. Policymakers are likely to pay more attention to downside risks to growth as inflation remains subdued. Any comments on yen weakness will also be a focus.

-ECB meeting: The bank has so far promised gradual tightening but there is a reasonable chance of a larger hike, in line with other central banks. Details on the new fragmentation tool should be released, with some degree of conditionality expected. The issue for the ECB may be the increasing splits on the Governing Council over how much rates need to rise without causing instability in the region’s bond markets.

22 July 2022, Friday:

-UK Retail Sales: Another decline is forecast by most analysts as the cost-of-living crisis starts to take its toll. Price pressures are intensifying with a drop in spending in larger discretionary items predicted. An added complication in forecasting and interpreting the data will be the bank holidays for the Jubilee and June.

–Eurozone PMIs: The market median estimate is for declines in manufacturing to 51.0 from 52.1 and services to 53.0 from 52.0. Analysts say that supply and cost pressures continue to weigh on manufacturing. Services are losing momentum from inflation pressures.