In the wake of the unexpected increase in interest rates implemented by the Reserve Bank of Australia earlier this week, the Bank of Canada too stunned the market by increasing its own rates. The expectation among investors that the Federal Reserve will put a halt to its monetary tightening in June was dashed.
After a four-month pause, the Bank of Canada has resumed tightening, signaling to the market that central banks continue to view inflation as too high and that rate hikes are not yet complete.
This was enough to cause traders to rethink their interest rate forecasts, which weighed on stock markets and dampened their appetite for risk. The 2-year Treasury yield increased by around 10 basis points to 3.80 percent, while yields on national debt surged everywhere else in the world.
Economists are nearly unanimous in their belief that the Federal Reserve Board will vote to raise interest rates again soon. The next meeting might take place as early as next week, or it could be postponed until July. According to CME FedWatch, the probability of a rate hike by the Federal Reserve of 25 basis points next week has risen to 36% from 22% yesterday.
This week's news has been light on context, and we still haven't heard anything from Fed policymakers regarding their upcoming meeting on June 14. As a result, the market's discomfort may be attributable primarily to shifting sentiment.
The May inflation data, due out next week, will have the most impact on market expectations as it will show whether or not the Fed needs to take hawkish measures.
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