The roller coaster ride that equity markets took into correction territory this past week has been characterized mostly by dizzying plummets and much less so by hopeful rebounds. Key to the wild swings was exceptionally inflated market volatility that reflected sharply elevated fear as the short-volatility trade that had prevailed for several years rapidly unwound in the span of just a couple of days.
Helping to spark this high volatility were increased concerns about rising inflation and interest rates as signaled by surging government bond yields, notably in the U.S. Exacerbating these concerns on a global basis, the Bank of England issued a warning on Thursday that interest rates may increase more quickly than expected. When combined with other major central banks that are seen as actively moving towards policy tightening, including the US Federal Reserve and European Central Bank, this signal from the BoE further supported market expectations that the end of easy monetary policy on a global basis is likely impending.
Just as these higher interest rate expectations hit equity markets suddenly and severely, they also (finally) had a marked impact on both the US dollar and gold this past week. While it had seemed that the battered dollar would be hard-pressed to rebound in the face of the intense bearish sentiment that prevailed throughout last year and in January, the greenback rebounded sharply this past week on the back of higher bond yields and interest rate expectations. Conversely, dollar-denominated gold tumbled on both a stronger dollar and higher rate anticipation, oblivious of any safe-haven demand that may have been generated by falling equity prices.
Heightened market volatility is likely to continue in the week ahead. Though there will be fewer major macroeconomic events and releases in the coming week than there were in the past week, the focus will remain on critically-important inflation data and interest rate expectations, with several key inflation releases scheduled. This will include UK CPI, New Zealand inflation expectations, US CPI, and US PPI. Some of the most important events and releases are as follows:
- Tuesday, February 13th:
- UK Consumer Price Index (Y/Y)
- Wednesday, February 14th:
- New Zealand Inflation Expectations (Q/Q)
- US Consumer Price Index and Core CPI (M/M)
- US Retail Sales and Core Retail Sales (M/M)
- Thursday, February 15th:
- Australia Employment Change and Unemployment Rate
- US Producer Price Index and Core PPI (M/M)
- Friday, February 16th:
- UK Retail Sales (M/M)
- US Building Permits and Housing Starts