Emerging Markets | Europe | Monetary Policy & Inflation | UK | US
Markets to Watch This Week: Time to Reconsider a 75bp Fed Hike in December
- By Bilal Hafeez and Ben Ford
- Sign-up to discuss on Slack
- 3 min read
We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
US markets were data-light in a Thanksgiving-focused week. Investors took the opportunity to further moderate their expectations for the Federal Reserve (Fed) on the back of dovish minutes; the US OIS-based terminal Fed funds rate has inched 5bp lower on the week. Consequently, US equities rose (S&P 500: +1.5% WoW; NASDAQ: +0.7% WoW).
While markets are determined for the Fed to decelerate in December, the outlook for the European Central Bank (ECB) has become less certain. German two-year yields paced higher (+9.7bps WoW; Chart 2) as European manufacturing PMIs surprised to the upside last week and ECB speakers turned more hawkish. Notably, ECB Board Member Isabel Schnabel sees ‘limited’ room to decelerate hikes (i.e., hike 50bp in December). Meanwhile, ECB Governing Council Member Madis Muller sang from the same hymn sheet. Markets ended the week assigning a 50% chance of a 75bp hike on 15 December – in line with Henry’s bias.
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We standardise WoW price changes across different markets to allow for cross-market comparisons.
Market Moves
US markets were data-light in a Thanksgiving-focused week. Investors took the opportunity to further moderate their expectations for the Federal Reserve (Fed) on the back of dovish minutes; the US OIS-based terminal Fed funds rate has inched 5bp lower on the week. Consequently, US equities rose (S&P 500: +1.5% WoW; NASDAQ: +0.7% WoW).
While markets are determined for the Fed to decelerate in December, the outlook for the European Central Bank (ECB) has become less certain. German two-year yields paced higher (+9.7bps WoW; Chart 2) as European manufacturing PMIs surprised to the upside last week and ECB speakers turned more hawkish. Notably, ECB Board Member Isabel Schnabel sees ‘limited’ room to decelerate hikes (i.e., hike 50bp in December). Meanwhile, ECB Governing Council Member Madis Muller sang from the same hymn sheet. Markets ended the week assigning a 50% chance of a 75bp hike on 15 December – in line with Henry’s bias.
In the East, China’s one- and five-year loan prime rate (3.65% and 4.30%, respectively) was left untouched. Meanwhile, the reserve requirement ratio was slashed by 25bp to 11.00% following a call from the State Council earlier in the week to loosen monetary conditions. However, the news played second fiddle to Covid-19 developments in the country. Protests spread over the weekend as residents resisted life under zero-Covid restrictions – Shanghai added PCR requirements for most public venues as 26 areas were determined as high risk. As a result, CNH returned above 7.20 while unrest spread across Asian equities (Chart 1).
Two DM central banks hiked in the background. The Reserve Bank of New Zealand (RBNZ) and Riksbank both hiked the policy rate by 75bp. Ben expects the former to follow with another 75bp hike in February while the latter to probably decelerate and hike by 25bp.
The Week Ahead
Fed Chair Jerome Powell and non-farm payrolls will set the market tone into year-end. The Fed’s Beige Book (Wednesday) will provide a very subtly nuanced view of economic changes with familiar themes (tight labour markets, rising cost pressures, stronger services and weaker goods consumption). The same day, Dominique expects Powell’s speech (Wednesday) on the economic outlook and labour market to be hawkish. She expects him to base it on the tight labour market and easing financial conditions. Closing out the week, Dominique expects personal spending, income and PCE inflation (Thursday) and non-farm payrolls (Friday) to bolster her case for a 75bp Fed hike on 14 December – a day before the BoE and ECB.
European CPI prints will be important, particularly in assessing the momentum in core inflation. On this front, given seasonality, there would only need to be a c.0.2% rise MoM for momentum to be maintained given November typically sees MoM deflation. Below 0.2% would prove dovish. The trend in energy prices from October to November will help in this regard. Currently, European markets are split between a 50bp or 75bp ECB hike in December. Henry continues to favour a 75bp ECB hike and a push towards passively winding down the balance sheet in 2023.
In the UK, mortgage data will be important, with the release of October mortgage data (Tuesday). So too will be the British Retail Consortium shop price numbers (Wednesday). Comments from Monetary Policy Committee hawk Dave Ramsden last week pointed toward the tight labour market and inflation expectations as the main rationales for more hiking. He also conceded cuts may be needed if his economic outlook is incorrect. On this, the Decision Maker Panel survey (Thursday) will be an important outturn. Recently, in line with our expectations, the survey, of business owners has shown a quickly pared expectation for inflation (Chart 3). If this trend continues, it would significantly reduce the argument that inflation expectations are de-anchoring.
Elsewhere, Australian CPI (Wednesday) will bolster the case for a 25bp Reserve Bank of Australia hike while we will have important updates on Canadian and Norwegian unemployment (Friday).
Watch Andrew and Dominique discuss the past week, notably whether there’s a division at the Fed, and the week ahead, concentrating on the inflation outlook, Chair Powell’s hawkish view alongside other Fed speakers and key data for the week.
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.