Marketmind: A policy of least regrets

A look at the day ahead in markets from Dhara Ranasinghe.

Overnight, Federal Reserve Chair Jerome Powell confirmed a half-point rate increase was “on the table” at the Feds May meeting, while other officials flagged the possibility of 75 basis-point moves.

The Bank of England‘s Catherine Mann said borrowing costs would probably have to rise further, while hawkish remarks from not-so hawkish members of the European Central Bank’s Governing Council shifted the dial again for bond markets

Money markets fully price in a half-point Fed move in May and some 80 bps of tightening in total from the ECB by year-end.

Where does that leave markets？ European and U.S. bond yields are testing new highs, as London trading kicks off. After a stock market tumble in Asia, equity futures point to weakness ahead across Europe and on Wall Street.

So, to the question of whether the increasingly aggressive stance by central banks triggers a sharp economic slowdown or contraction.

Flash purchasing managers indexes (PMI) out across the globe on Friday may offer clues, especially since they have proved resilient in the face of war in Ukraine and new supply chain blows.

Rate-setters faced with surging inflation may choose to adopt the policy of least regrets — a phrase used by the Reserve Bank of New Zealand last week after it hiked rates by aggressive 50 bps.

In short, its better to go hard against inflation now with big rate hikes, and risk a small recession, than have to hike more later and risk a bigger recession. Time will be the judge.

Resilient PMIs to be put to the test https://fingfx.thomsonreuters.com/gfx/mkt/gdvzyawdwpw/PMIS2204.PNG

Key developments that should provide more direction to markets on Friday:

– Japan March consumer prices rise at fastest pace in over 2 years

– S&P Global flash PMIs everywhere

– Frances Macron consolidates poll lead after TV clash

– UK retail sales tumble as inflation jump hits demand

– UK PM Johnson will face contempt probe, reigniting leadership doubts

– International Monetary Fund and World Bank meets

– European Central Bank President Christine Lagarde speaks

– European earnings: ASML, EssilorLuxotica, Renault, SAP, Volvo,

– Schlumberger, American Express, Newmont Mining, Verizon, Kimberley Clark