Equities | Europe | Monetary Policy & Inflation | US
Markets to Watch This Week: A Week of Central Bank Hiking
- By Bilal Hafeez and Ben Ford
- 3 min read
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
US inflation is stubborn (CPI: +0.1% MoM, +8.3% YoY; Core: +0.6% MoM, +6.35 YoY). We knew it would be, and Dominique still thinks the Fed could eventually hike to 8%. It is no surprise then that the US 2Y climbed 36.4bps last week (Chart 2). Moreover, equity bears were revived (S&P 500: -4.85 WoW) while the US dollar found another leg of strength. Further out, Dominique expects US CPI to fall in line with her big picture view: stabilisation of core goods inflation as supply bottlenecks persist, and accelerating services inflation due to the tight labour market.
The Week Ahead
Central bank meetings will dominate this week. The Riksbank have already hiked the policy rate to 1.75% (+100bps!). But the Federal Reserve (Wednesday), Bank of England, Swiss National Bank, Norges Bank, and Bank of Japan (all on Thursday) are still to come.
Dominique expects the Fed to hike by 75bp. In addition, since the Fed has very deliberately and explicitly let go of forward guidance, she sees a risk that it could let go of the dot plot, since it constitutes long-term forward guidance. If they keep the dot plot, she expects the terminal rate to rise 50bp while maintaining the possibility of a soft landing, though this is not her base case. And during the Fed presser on Friday, she sees Chair Jerome Powell addressing the divergence between inflation expectations and actual inflation; why the Fed is struggling to tighten financial conditions; and whether the inflation target should be raised – though she doubts he will mention the third issue directly.
Henry expects the BoE to hike by 50bp, supported by recent comments that point more to a ‘wait and see’ attitude to the effects of fiscal policy. The Monetary Policy Committee is also likely to vote to begin the active sale of gilts, at the previously announced rate of £10bn per quarter.On the outlook, he thinks remarks on the hiking path will probably be deferred to the updated November meeting, when the new Monetary Policy Report (and forecasts) will be released. At the November meeting, he thinks the stage is set for a strong dovish pivot. Elsewhere in Europe, the SNB are expected to hike the policy rate to 0.50% (+75bp) while we see Norges Bank hiking policy to 2.25% (+50bp).
Bilal expects the BoJ to leave its 10-year JGB yield target (0%, +/- 0.25%) unchanged, though the risk is that they could lift the upper bound of their yield curve control (YCC) policy. JGB 10-year yields have been trading near, and above, the upper bound. With most central banks around the world having started their hiking cycles and recent Japan MoF concern around the pace of yen weakness, there could be cause for them to adjust their policy.
For further analysis, see our week-ahead preview, and watch Andrew and Dominique discuss what’s next for global markets, a US wage-price spiral, and their views on the Fed!
Ben Ford is Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.