Hawkish Tone from Chairman Powell and Bank of England's Surprise Rate Hike Drive Market Sentiment

The focus of the financial markets this week revolved around the hawkish sentiment expressed by Chairman Powell during his annual state of the economy address to Congress. His remarks echoed his post-FOMC comments from the previous week, emphasizing that the pause in June was temporary, and the overnight rate is likely to see further increases later this year, potentially even twice.

The market took note of this, resulting in the 5-year Treasury note surpassing 4.0%, a level not seen since February. Furthermore, the April 2024 Fed Fund futures traded above 5.0%, as traders speculated that high overnight rates might persist into the following year.

BoE Rate Rise Exceeds Projections

In line with expectations, the Bank of England (BOE) raised its overnight lending rate by 50 basis points (bp) to 5.0%, exceeding economists' projections of a 25 bp hike. Similar to the Federal Reserve, the BOE left the door open for additional rate increases to tackle their ongoing inflation concerns.

Reflecting this anticipation, the Pound Sterling continued to exhibit strength against the U.S. dollar, reaching levels above 1.27, marking an impressive nearly 20% increase since its low point in September 2022.

Slight Decline in US Markets

US stock markets experienced a downward trajectory this week, with the NASDAQ and S&P 500 declining by 1.4%, and the Dow by 1.7%. The oil market also faced challenges, failing to sustain a position above the 50-day moving average, resulting in a 3.4% decline.

Meanwhile, gold continued its downward trend, finishing the week with a 1.8% decrease. US 7-10 Year bonds and US aggregate bonds remained relatively stable, exhibiting little movement over the week.

Volatility, as measured by the VIX, experienced a significant drop and concluded the week at 13.44, marking its lowest level since the pre-COVID era. However, it is noteworthy that contango, the term structure of the VIX futures, remains steep, with a 1-month contract trading at 15.95 – a premium of 18.5%. The 2-month and 3-month contracts also displayed similar elevated levels at 17.5 and 18.5, respectively.

The Week Ahead

Looking ahead to the coming week, the economic calendar is brimming with significant releases, including Durable Goods, Case-Shiller home price index, and the Conference Board's data, among others. However, it's important to bear in mind that transaction volume is expected to taper off towards the end of the week due to the upcoming Independence Day holiday falling on the subsequent Tuesday.