Monetary Policy & Inflation | UK | US
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
Markets concentrated on the Federal Reserve (Fed), Bank of England (BoE) and European Central Bank (ECB) over the past week. Whileall delivered 50bp hikes, outlooks differed. Norges Bank also met.
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We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
Markets concentrated on the Federal Reserve (Fed), Bank of England (BoE) and European Central Bank (ECB) over the past week. Whileall delivered 50bp hikes, outlooks differed. Norges Bank also met.
The Fed raised the target range for the federal funds rate (FFR) to 4.25-4.5% – a 50bp hike. To many, this was just a formality. The adjoining Summary of Economic Projections (SEP) and following press conference mattered more. The SEP was more dovish than Dominique expected and continued to show a soft landing largely based on ‘immaculate disinflation’.
Meanwhile, the presser was hawkish. Fed Chair Jerome Powell ruled out an increase in the inflation target anytime soon and left open the possibility of a further increase in the FFR. Dominique continues to believe the market is underpricing the terminal and end-2023 FFR. She also thinks markets are mispricing the February meeting – 30bp priced, Dominique expects 50bp. Read Dominique’s Fed review.
The BoE also hiked by 50bp. The Monetary Policy Committee (MPC) voted to increase the Bank Rate to 3.5%. However, the decision was not in unison. Two members voted to pause (0bp hike to 3.0%) while one voted to continue to front load (+75bp hike to 3.75%). And on forecasts, they revised the near-term GPD forecast higher, but the (more important) medium-term forecast lower. Meanwhile, the revised forecast for inflation proved more dovish than he expected. Looking forward, he anticipates a February pivot as the MPC weighs up revised forecasts with a weakening labour market.
Then there was the ECB. They also hiked by 50bp. But this time out, the ECB were decidedly more hawkish. Going forward, interest rates will have to rise ‘significantly at a steady pace’ to battle a notable upward revision to inflation. They now expect inflation to be 1.3pp above target in Q4 2024. Unsurprisingly, ECB President Christine Lagarde hammered home the message we have been plugging for some time: the market is significantly underpricing the terminal depo-rate. They also began quantitative tightening (QT) at the pace of €15bn per month from March 2023. At that point, the rate will be revised.
Elsewhere, Norges Bank must feel left out. They delivered a change to the policy rate half the size of their larger G10 constituents – a 25bp hike to 2.75%. The new forecasted rate path is more hawkish than expected and little changed from September. The peak remained at ~3.1% (i.e., stuck between 3.00% and 3.25%). If inflation and unemployment eases quicker than forecasted, the policy rate will likely end at 3%. Meanwhile, particular attention will be paid towards how wages develop.
What to Watch into Yearend
Fed watchers can enjoy Christmas (ish). There are no Fed speakers scheduled over the next two weeks. There is data, though. The most important are Personal Consumption Expenditure (PCE), personal income and savings (23 December).
In Europe, it is setting up to be a quiet week with little by the way of first-tier data. After last week’s hawkish ECB meeting, the draw may be ECB speakers. On that front, today we hear from Vice-President Luis de Guindos (neutral), and Lithuania’s Gediminas Šimkus (neutral), and on Tuesday from Slovakia’s Peter Kažimír (hawk) and Estonia’s Müller (hawk).
Of these, de Guindos’ voice will be the most important to hear. In his most recent comments, he stated he sees inflation stable for the next three-four months, suggesting there is good room for the kind of substantial tightening that ECB President Christine Lagarde telegraphed at the presser. He also commented that his vote at the December meeting would be contingent on data, so it will be interesting to understand what he saw as appropriate at that meeting.
Among the other voices, Šimkus has previously stated that hikes can continue after March if needed. It will be interesting to hear whether the conviction behind this has increased given the hawkish forecasts. Amongst the hawks, Kažimír has been fervent that interest rates will need to get into strongly contractionary territory, Henry expects this will remain his view. Finally, Müller will likely repeat his comments from a blog post on Friday that rates will go further than markets are pricing. This aligns with Henry’s conviction.