Policymakers have made it very clear that most major central banks are now pulling out all the stops to win back inflation fighting credibility. A string of interest rate hikes means selling is taking place across asset classes in the context of ongoing angst over the now heavy-handed nature of monetary policy. Significantly above-target inflationary dynamics are spooking central bankers and trumping sensitivity around growth data and financial conditions.

Since before the publication of the US CPI number on 10 June, the blue-chip US equity market, the S&P500, is down around 8% and setting new year-to-date lows. Many Wall Street commentators now have their eyes fixed on the 3,500 level in the benchmark. This is roughly the halfway point of the March 2020 low during the pandemic and the January record high. The 200-week Simple Moving Average also comes in around this psychological mark. Ten-year US Treasury rates have increased more than 30bps in the same period since the last US inflation data, and intraday volatility in bond markets has been massive with in excess of 20bps between the highs and lows. These are relatively huge moves in a matter of hours.

In this environment of rising rates and risk-off sentiment, dollar bulls are endeavouring to make their way to recent highs once more. Numerous sentiment gauges are flashing red with the VIX above 30 and the Bank of America’s Bull & Bear indicator dropping to zero/extreme bearishness for the first time since 2020. Other central banks are not as advanced in their tightening process as the Fed so this should also see support for the greenback.

But the risk of hawkish surprises from various parts of the world means yield will rise further still. The widely watched 10-year US Treasury has 3.5% firmly in its sights, even if traders may have to wait for the next inflation print to test that level again. At the same time, a series of poor US data intensified fears that the Fed’s anti‐inflation campaign might come at a huge cost for growth.

With little major data on the calendar, risky assets will remain subdued, though the blackout period for FOMC speakers has ended so it will be worth listening to the wires. Growth currencies may struggle while the shift by the normally uber-dovish SNB should continue to help the Swiss franc. Markets await more detail around the anti-fragmentation tool which could encourage the ECB to execute a series of rate hikes in time.

Major risk events of the week

22 June 2022, Wednesday:

-UK CPI: Analysts forecast the headline CPI to remain at 9.0% and the core to slip to 6.0% from 6.2% in April. But they expect a combination of former food costs, higher petrol prices and another sharp jump in the energy price cap in October to push inflation into double figures over the coming months.

23 June 2022, Thursday:

–Eurozone PMIs: The market median estimate is for declines in manufacturing to 53.7 from 54.6 and services to 55.5 from 56.1. Supply chain issues are ongoing. Analysts question how long the recovery in the service sector can offset weakness in manufacturing with inflation’s impact on consumer spending the chief concern.

24 June 2022, Friday:

-UK Retail Sales: May’s BRC figures point to softer monthly sales, as the shift towards services and away from goods continues. The cost-of-living crisis is expected to slow high street activity sharply over the year with the timing and size of the squeeze proving highly uncertain.

-German IFO Business Survey: Consensus forecasts a headline print of 92.0 from May’s 93.0. The Ukraine conflict and the embargo on energy imports from Russia continue to cast a shadow over sentiment. The German government is expected to cut its growth forecast for this year due to the war’s impact.