Fed hawkish rhetoric continues, Russia set for default

A look at the day ahead in markets of Saikat Chatterjee.

It's easy to take it easy. That seems to be the message from global markets to policymakers at the beginning of a busy week.

With Russia setting for a sovereign default and Kyiv's missiles hitting for the first time in weeks, investors will find it hard to believe.

U.S. Federal Reserve officials have kept up their hawkish rhetoric, with San Francisco Federal Reserve Bank President Mary Daly saying on Friday that another 75 basis point interest rate hike in July is her starting point, but markets have dialled down bets of aggressive rate hikes.

The Fed fund futures contracts rallied towards the end of last week, suggesting a terminal U.S. interest rate of around 3.5% by mid- 2023, well below a peak of more than 4% seen two weeks ago.

Even a 75 bps rate hike is not a surefire bet next month, as economic surprise indexes in Europe and the United States have collapsed in recent weeks. Citibank believes that there will be a 50% chance of a global recession.

Markets are liking the mood music with world stocks extending gains after posting their biggest single day rise in more than three months on Friday. The dollar is struggling compared with its major rivals and 10 year Treasury yields are hovering around 3.13%, which is well below the decade highs of 3.46%.

There are plenty of events this week that can trip up the fledgling rally. The European Central Bank's annual forum in Sintra will be a highlight, with ECB President Christine Lagarde and Federal Reserve Chair Jerome Powell also attending the meeting.

The Fed's favoured inflation gauge, the Hopes of Inflation, will be tested this week, and the UK will release Q 1 GDP, current account and final June manufacturing PMI when the U.S. PCE price index is out on Thursday.

Russia looked poised for its first default in decades as some bondholders said they had not received overdue interest on Monday after the end of a key payment deadline a day earlier.

Key developments that should give more direction to markets on Monday:

After a sharp fall in April, the profits at China's industrial firms shrank at a slower pace in May.

Ryanair says less than 2% of the flights affected by the strike are affected by strike.

Pfizer BioNTech say that Omicron-based COVID shots improve response compared to that variant.

Four of the Group of Seven countries banned imports of Russian gold in order to tighten the sanctions on Moscow.