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From a macroeconomic perspective:
• The US: June rate hike on the cards
After a soft patch in Q1, recent data prints are pointing to acceleration in growth in the second quarter. We expect the FOMC to hike rates at the next meeting in June, and we are looking for more clarity on the Fed’s balance sheet run off. Any announcement on balance sheet reduction would put upward pressure on yields, reinforcing our negative take on US fixed income.
• The UK: A ray of sunshine
Recent data draws a slightly more positive picture of the UK economy with a bounce in retail sales and improvement in forward-looking indicators across sectors. Meanwhile, the BoE continues to look through rising inflation and we expect it to remain in stand-by mode for the remainder of the year. Should we see a favourable election outcome and improving economic conditions, we would expect the BoE to alter its stance and prompt a move higher in the currency and move lower in the gilt markets.
• The Eurozone: Changing forward guidance
The Euro area shows broad-based recovery across countries and data is indicating positive momentum going into the second quarter. The minutes of the ECB’s April meeting display an increased likelihood in a change in forward guidance, consistent with our expectation for mentions of downside risks to growth to be removed from the Draghi’s introductory statement in June. With yields at all-time lows, we see limited upside to prices and would expect government bonds to come under pressure.