Europe | Monetary Policy & Inflation | US
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Market Moves
10 Federal Reserve (Fed) speakers pushed market pricing more hawkish over the past week (Charts 1 and 2). Susan Colins noted ’75[bp] still is on the table’. Meanwhile, wider Fed speakers confirmed the terminal Fed funds rate (FFR) would be lifted in the December Summary of Economic Projections (SEP) from the current 4.5% to 4.75%. Mary Daly, a dove, argued for a terminal FFR between 4.75% and 5.25% while Bullard, a hawk, argued 5% would only get the FFR at the bottom of the ‘sufficiently restrictive zone’ that has 7% as an upper bound. Further afield, Raphael Bostic pushed back against the Fed cutting aggressively in 2023 unless inflation was heading back toward 2%.
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We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
10 Federal Reserve (Fed) speakers pushed market pricing more hawkish over the past week (Charts 1 and 2). Susan Colins noted ’75[bp] still is on the table’. Meanwhile, wider Fed speakers confirmed the terminal Fed funds rate (FFR) would be lifted in the DecemberSummary of Economic Projections (SEP) from the current 4.5% to 4.75%. Mary Daly, a dove, argued for a terminal FFR between 4.75% and 5.25% while Bullard, a hawk, argued 5% would only get the FFR at the bottom of the ‘sufficiently restrictive zone’ that has 7% as an upper bound. Further afield, Raphael Bostic pushed back against the Fed cutting aggressively in 2023 unless inflation was heading back toward 2%.
Also in the US, the Senate remains blue, ahead of a runoff in Georgia that could add to the Democratic majority. Meanwhile, the House has turned red with the GOP likely to command a majority of three seats. Democratic leaders have announced their intention to raise the debt ceiling during the lame duck (i.e., before the end of the current Congress). This would remove a major GOP leverage to impose stringent fiscal consolidation next year. Meanwhile, in an emergency appeal, the administration has asked the Supreme Court to let it proceed with its student loan forgiveness program, currently on hold due to lower courts litigation.
The past week struggled to produce more concrete evidence of the Bank of England’s (BoE) dovish pivot. Despite a fall in employment and continued weakness in retail sales, the Autumn Statement produced a more supportive fiscal picture in the near term than Henry had expected. Meanwhile, the surprise spike in October food inflation added credibility to a BoE profile that Henry would otherwise consider overly hawkish. In such an environment, while Henry continues to expect the BoE to pivot dovishly ahead, there is a strong risk of more BoE hiking priced in the near term.
Oil slumped lower over the past week. Brent Crude managed to slip 2.4% lower on Friday on a week that saw it 8.7% lower (Chart 3). The near-term outlook has deteriorated with the curve moving into contango as China’s expected demand has lessened on surging Covid-19 cases. On the surge in cases, China has recorded its first death since 26 May – an 87-year-old man in Beijing. Latest figures show 66% of those aged 80 and above are fully vaccinated, while only 40% have had a booster. Cases are likely to keep climbing; China’s National Health Commission warned against excessive testing in low-risk areas while a number of Chinese cities have cancelled or suspended mass PCR testing.
The Week Ahead
Attention turns to Fed minutes (Wednesday) where Dominique expects them to repeat the message that slower rate increases will come with a higher terminal FFR. The Fed’s Loretta Mester, Esther George and Jim Bullard are all due to speak tomorrow (Tuesday).
Turning to Europe, France, Germany and the UK will all see preliminary November PMIs (Wednesday). While the expectation is for continued negativity, the recent paring in European gas and electricity prices and the re-opening of China may provide upside to European manufacturing. For now, Henry’s expectation remains that the Eurozone slowdown will be insufficient to cap inflation, and significantly more European Central Bank (ECB) tightening will be needed. Henry continues to expect another 75bp ECB hike in December, alongside the board moving towards a consensus for a 2023 start to quantitative tightening.
Focusing on the UK, the week ahead will provide an insight into more BoE policymaker thoughts with Jon Cunliffe (Monday), Huw Pill (Wednesday), Dave Ramsden and Catherine Mann (Thursday) all speaking. For Henry, the most important aspect will be in understanding more around how they view the Autumn Statement outturn for inflation. Previously, Mann’s comments have focused on inflation expectations and sterling weakness.
Elsewhere, Ben expects the Reserve Bank of New Zealand to hike the policy rate to 4.25% (+75bp) on Wednesday and the Riksbank to take a smaller step to 2.25% (+50bp) also on Wednesday.
Watch Andrew and Dominique discuss the past week, notably Fed speakers and noise on terminal rate, and the week ahead, concentrating on Fed minutes, US Capital Goods orders data and Atlanta Fed GDP data.
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.
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.