Markets to Watch This Week: Fed, BoE and ECB to Hike Interest Rates

We standardise WoW price changes across different markets to allow for cross-market comparisons.

Market Moves Over the Past Week

Last week proved relatively light across major markets. The US economy registered a stronger-than-expected reading through Q4 (+2.9% QoQ SAAR). On the details, Dominique noted that a shortfall of final sales, relative to GDP, reflect largely past excesses while consumption surprised on the downside. However, its fundamentals remain strong and are likely to make a comeback. Elsewhere, residential investment is now 10% below its pre-pandemic peak and could be close to stabilisation while non-residential investment growth slowed but reflects short-term volatility.

Meanwhile, US equity markets mostly continued to find the silver lining in earnings reports last week. The S&P 500 rose 2.5% last week, and the NASDAQ 100 posted an impressive 4.7% gain despite an atrocious earnings report and outlook from industry bellwether Intel (INTC).

Next door, the Bank of Canada stole the headlines. They hiked the policy rate by 25bp to 4.50%, as we had expected, and announced a conditional pause for the March meeting. Going forward, they have a short, but important checklist: services disinflation, retreating inflation expectations, moderating wage growth accompanied by increasing services productivity, and easing labour market tightness. An accumulation of opposing data would prevent them from pausing. Therefore, if they hike again, we think it would be in April when more data is available. We expect this is the final hike of the cycle. Attention now turns to cuts.

In Australia, neither the NAB Business Survey nor Q4 CPI did much to deter us from expecting a 25bp Reserve Bank of Australia hike on 7 February. Touching on the first, the aggressive moderation of demand figures alongside costs and prices were the most important updates. However, this is yet to be reflected across all surveys. And on the second, the updated CPI (quarterly measure: +7.8% YoY; +1.9% QoQ & monthly measure: +8.4% YoY) beat expectations across the board. Notably, services CPI (+5.5% YoY) increased at the fastest pace since 2008, while goods CPI (+9.5% YoY) showed little change from Q3.

Lastly, in New Zealand, we have changed our call on the RBNZ: 50bp hike in February, not 75bp. This follows a CPI that proved hotter than markets expected but fell short of RBNZ forecasts. Combining this with the poor retail sales data, contractionary BusinessNZ PMIs, another dire ANZ Survey, and the weaker NZIER survey, the case for a 75bp February hike is thin.

What to Watch

The Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) will dominate headlines this week. The Fed are expected to deliver the smallest move of the three.

Dominique expects the Fed (Wednesday) to hike 25bp and Chair Jerome Powell to address questions on possible cuts this year. He could stress that more data is needed to confirm inflation is on a sustained downward path and that inflation would have to be clearly below the SEP end-2023 forecast for the Fed to consider a change in policy.

Prior to the ECB (Thursday), Henry is expecting economic data to continue to apply hawkish pressure. He notes that markets are expecting no change in Q4 GDP (Tuesday) alongside continued robustness in core inflation. Such outturns would do little to dissuade the ECB from their hawkish tracker. Moreover, there are growing signs of second-round effects taking hold:

• Forward looking wage growth continued to accelerate through Q4.
• Long-term energy security remains an issue – while no one knows for certain how Europe will replace Russian gas long-term, whether it is via LNG, renewables or nuclear, it is almost certain to be more expensive than the cheap piped gas it relied on previously. Schnabel had noted this risk even before Russia’s invasion.
• Upward surprises in GDP – as stated above (Chart 1).
• Expansive fiscal policy continues to sit at odds with monetary policy. Non-targeted government spending has the ECB concerned – it accounts for 80% of 2023 energy measures.

In this environment, Henry expects the Governing Council to deliver a 50bp hike, with little rationale for Lagarde to walk back her calls for another 50bp in March. Meanwhile, on QT, at this stage there is little reason to expect additional guidance on the pace of the winddown beyond the fact that the €15bn pm rate will be revisited in June.

Across the channel, Henry expects the BoE (Thursday) to prove the more interesting decision. He believes they are approaching the terminal rate. His base case is for them to hike 50bp but signal a strong desire to pause thereafter.

Watch Andrew and Dominique discuss the key data points over the past week, why PCE core inflation is still not a data point the market pays enough attention to, why Dominique thinks the FOMC will continue to hike rates, the latest views across the labour market and housing market, and much, much more!

Ben Ford is a 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.