Stock and bond markets continued to sell off in April and early May amid heightened volatility as investors grapple with a new central bank regime ushered in by Europe’s highest inflation rates. era of inflation targeting, RBC Economics said in its Financial Markets Monthly on Wednesday. .
Gone, RBC said, was the cautious approach to monetary policy seen over the past decade, with central banks raising rates to post-financial crisis (BoE) highs for the first time in a decade (RBA and soon the ECB), or go for the biggest single-meeting hikes in over 20 years (Fed and BoC). He added: “Markets are hoping these moves will continue, with central banks driven to raise rates to a more neutral stance or even beyond – something we haven’t seen in the last cycle – as the urgency to fight inflation is growing.”
RBC noted that the latest round of consumer price data provided more upside surprises – the largest yet in some of the countries tracked by the bank – while falling jobless rates and rising wages suggest that domestic price pressure will provide a floor for inflation even if global factors begin to ease.
The RBC Economics team said it found itself revising its central bank’s forecast upwards, both accelerating the previously expected pace of tightening and raising terminal rates for this cycle. But they maintained the view that in most jurisdictions market prices are “too aggressive”, particularly in 2023, as concerns about late-cycle growth and rising inflation to slow down will eventually lead policy makers to tone down their warmongering attitude. “For now, however, everything is moving forward as central banks seek to remove stimulus measures and put monetary policy in a framework more appropriate to current economic conditions.”
RBC expects more 50 basis point hikes from the Fed and BoC, steady increases from the RBA, a few more BoE hikes and the start of the ECB’s tightening cycle after eight years of negative interest rate policy. He said: “If we are correct that market prices for rate hikes are stretched, we should see yields stabilizing around current levels with some retracement towards 2023. But if recent trends are any indication , the road might be bulge.”