It was a huge week for Bankers, we had the big central bank triple header, the Federal Reserve (Fed), Bank of England (BOE) and European Central Bank (ECB) all deliver their last meetings of 2022. Markets responded with risk off and the spread widened between European and U.S. paper. Treasury yields declined this week in the face of a surge in European yields. It was more than the big three, the Central Bank collusion continued, a necessity given the strong USD to maintain order. Following Wednesday’s Fed +50bps ECB +50bps Bank of England +50bps Swiss National Bank +50bps Banco de México +50bps Philippines +50bps Hong Kong Monetary Authority +50bps Norges Bank +25bps Taiwan +12.5%bps.
Central bank monetary policy decisions and market activity interest rate decisions can have a dominant effect on financial markets, fiscal policy and geopolitics. We keep an eye on key banker developments, what they mean and what is ahead.
Central Bank Weekly Analysis and Outlook – Banker dynamics are complex. There are myriad facets to analyze and contemplate.
To say central bankers, have issues is an understatement. Already grappling with the quickest inflation in decades they now have these decisions to make, forcefully raise borrowing costs to defend currencies and risk hurting growth, spend reserves that took years to build to intervene in foreign exchange markets, or simply stand aside and let the market play out.
Weekly Recap and Outlook
We had two major events the US CPI report and then the Central Banker Maelstrom of rising rates following the Fed on Wednesday. The November Consumer Price Index (CPI) came in tamer-than-expected on Tuesday. The thought was by many that the moderation in headline inflation should convince the Fed to temper the pace of its rate hikes to a lower ceiling on its terminal rate. This was not to be as we saw from Powell Wednesday.
Powell in the Press conference: “Changing our inflation goal is not something we’re thinking about, and it’s something we’re not going to think about… I think this isn’t the time to be thinking about that. I mean, there may be a longer-term project at some point.”
When one looked deeper into the CPI the sticky, and elevated, core services number was a concern ahead of the FOMC, and helps explain the hawkish in the updated Summary of Economic Projections, and Fed Chair Powell’s press conference on Wednesday. The median estimate for the terminal rate in 2023 had been raised to 5.10% versus the September projection of 4.60%.
ECB Chair Lagarde was fearsome in her dire warnings for the European economy following the ECB announcement. The market worried even more about the risk facing Europe with high energy costs, in Italy in particular.
The Fed and ECB didn’t let up on Friday with further rate hike speculation remained alive as several policymakers from the European Central Bank waxed on about the need to continue raising rates while San Francisco Fed President (non-voter until 2024) Daly said that it would be reasonable to hold rates at a peak level for nearly a year and that she doesn’t understand why the market is optimistic about future inflation
The expected Fed funds rate at the FOMC’s March 16th meeting dropped 10 bps this week to a seven-week low 4.78%. The expected rate for the June 15th meeting fell 15 bps to a nine-week low 4.76% (December down 18bps to 4.35%).
Highlights – Federal Reserve
- Federal Reserve Credit was little changed last week at $8.547 TN.
- Fed Credit was down $354bn from the June 22nd peak.
- Over the past 170 weeks, Fed Credit expanded $4.820 TN, or 129%.
- Fed Credit inflated $5.736 Trillion, or 204%, over the past 527 weeks.
- Fed holdings for foreign owners of Treasury, Agency Debt last week increased $1.8bn to $3.308 TN – off the low since June 2017.
- “Custody holdings” were down $129bn, or 3.8%, y-o-y.
Central Bank Rate Hike Week Extravaganza:
It all started with a Kiss from the Fed….
Central Bank Week Ahead:
The most notable events in the US include the PCE price index, which will provide further insights into the Federal Reserve’s rate path given it is their favorite inflation indicator. The Bank of Japan delivers its latest policy decisions on Tuesday. While no changes are expected at this meeting, we watch if policy change may be ahead in 2023. The Central Bank of Turkey is likely to keep rates steady when it meets on Thursday, after cutting its key rate by 1000 bps since September 2021. The People’s Bank of China will meet to decide on its loan prime rate after leaving it unchanged for three consecutive meetings. The Indonesian central bank’s monetary policy decision is due. In Australia, the RBA releases minutes from its latest meeting for insights on the bank’s third straight 25bps rate increase.
This Week’s Interest Rate Announcements (Time E.T.)
- 22:00 BoJ Interest Rate Decision Monday, Dec. 19
- 02:30 BI Interest Rate Decision Thursday, Dec. 22
- 06:00 TCMB Interest Rate Decision Thursday, Dec. 22
Monday, Dec. 19
- 06:00 German Buba Monthly Report
- 19:30 RBA Meeting Minutes
- 20:15 PBoC Loan Prime Rate
- 22:00 BoJ Press Conference
- 22:00 BoJ Interest Rate Decision
Tuesday, Dec. 20
- 03:00 ECB’s De Guindos Speaks
Wednesday, Dec. 21
- 06:30 RBI MPC Meeting Minutes
- 09:00 SNB Quarterly Bulletin
Thursday, Dec. 22
- 02:30 BI Interest Rate Decision
- 06:00 TCMB Interest Rate Decision
- 18:50 BoJ Monetary Policy Meeting Minutes
Friday, Dec. 23
- 09:46 Dallas Fed PCE (Nov)
The Fed with a Strong US Dollar
The strong dollar is likely to negatively affect the US economic outlook and could alter the Federal Reserve terminal interest rate, economists surveyed by Bloomberg said. Just 28% saw the currency strength as unlikely to have any impact.
The survey of 40 economists was conducted Oct. 21-26.
- 44% said they believed the Fed could fully complete its aggressive rate tightening despite possible stresses.
- 38% said the policy makers would be forced to cut rates earlier than expected and
- 18% said the Fed would not be able to raise rates as much as planned.
- Survey respondents expect rates to peak at 5% early next year and a majority of the economists now expect a US and global recession.
The Fed as expected raised another 50 basis-points last meeting. The median estimate for the terminal rate in 2023 had been raised to 5.10% versus the September projection of 4.60%. The value of the dollar is an important component to lowering inflation. A stronger dollar tends to dampen inflation by reducing the costs of imports and lowering domestic production as it raises export prices.
“Usually the trade deficit would balloon when the dollar appreciated as much as we had seen since last year. But that effect has been curiously absent so far, even as we are already about five quarters into the appreciation process. One possible explanation is that US is increasing its exports in energy products. The fact that this tightening channel of dollar is absent means that the dollar appreciation is less contractionary to the economy than historically.”Anna Wong (Bloomberg chief US economist)
Latest Key Central Bank Decisions, Reports Archive
- Banco de México Raises Rates by 50 bps to Record High 10.50%, Hints at More Hikes
- ECB Raises Rates Another 50 bps as Expected, Forecasts Higher Inflation
- Bank of England Raises Interest Rates 50bps to 3.5%, Projects Inflation Likely Peaked
- Taiwan Raised Interest Rate by 1.75 percent, Highest Since 2015
- Norway Raised Interest Rate by 25 bps to 2.75 percent, Highest Since 2009
- Swiss National Bank Raises Policy Rate by 50 bps to 1.00%, as expected
- Philippines Central Bank Raised Rates by 50 basis points to 5.50% with Inflation at 14 Year Highs
- Hong Kong’s Monetary Authority Raised Interest Rates in Lockstep with US Federal Reserve
- Federal Reserve Raises Rates 50bps as Expected, Hawkish Revisions to Unemployment and Inflation
- Bank of Canada Hikes Rates 50 bps to Highest Level Since 2008
- Reserve Bank of India Hike Rates Fifth Time in a Row to 6.25%
- RBA Raises Rates to Ten Year High 3.10%, says Inflation in Australia Too High
- Federal Reserve Beige Book Highlights Higher Interest Rates Further Dented Home Sales
- NY Fed Williams Expects US Jobless Rate to Rise from 3.7% to 4.5-5.0%
- Turkey Central Bank Cuts Interest Rates Another 150bp Ending Easing Cycle
- Sweden’s Riksbank Raise Rates by 75 bps to the Highest Level Since December 2008
- South Africa Raises Interest Rates 75bps to Tame Inflation
- Bank of Korea Raises Rates To 3.25%, Highest level Since June 2012
- Reserve Bank of New Zealand Raise Rates by 75bp to 4.25% to Highest Since January 2009
- Appreciation of Swiss Franc Guards Against Inflation says SNBs Jordan
- Fed Vice Chair Brainard says Slower Pace of Rate Increases Probably Soon
- Bank of England Raises Interest Rates 75bps to 3% in Biggest Rise in 30 Years
- Norway Raised Interest Rate by 25bps, Norwegian Crown Fell Against Euro
- Markets Reverse Sharply on Feds Powell Statements, What Does it all Mean?
- Federal Reserve Again Raises Rates 75bps as Expected, Hints at Possibly Smaller Hikes
- Japan Spent ¥6.35 trillion in October on Intervention to Support the Yen
- ECB Raises Rates Another 75 bps as Expected TLTRO Terms and Conditions Recalibrated
- Bank Indonesia Raised Rates by Another 50 basis points to 4.75% to Tame Inflation
- Federal Reserve Beige Book Highlights Employment Strength as Price Increases Generally Moderate
- RBA says Financial Stability Risks Have Increased Globally
- Banco de México Raised Rates for 11th Straight Time to Record 9.25%
- Cable Pounded Again After Indecisive Bank of England Statement
- Japan Intervened to Support Yen for First Time Since 1998 After BOJ Decision
- Swiss National Bank Raises Policy Rate by 75 bps to 0.50%, Swiss Franc Falls sharply
- Philippines Central Bank Raised Rates by 50 basis points to 4.25%, Moves to Support Peso
- Bank of Japan Monetary Policy Unchanged Sending Yen to a Fresh 24-Year Low
- Brazil Central Bank Pauses Rates at 13.75%, after Inflation Eased Below 10%
- Federal Reserve Gives All Banks a Pass in Annual Bank Stress Test
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From The TradersCommunity Research Desk