For the most part no surprises from central banks this past week. We got rate hikes as expected from Australia, India, and Sweden. However, Banco de México raised interest rates by 50 basis points rather than the expected 25bps as January inflation accelerated for the second straight month. Peru’s BCRP surprised by holding its policy rate unchanged at 7.75% instead of a 25bps hike. The most significant chatter on central bank watch is around the next BoJ boss. We have seen the hawkish market reaction to the surprise indication that Kazuo Ueda will be appointed as the next BoJ Governor.
In the week ahead we get 2 central banks delivering policy decisions, Bangko Sentral ng Pilipinas Bank Indonesia. We have a slew of Fed speakers to comment on the CPI number due out which will be watched.
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
This week’s central bank main event was the Reserve Bank of Australia (RBA) and the talk of the housing market and mortgage rates. The Reserve Bank of India was also significant given what is going on with the Adani market value collapse. Sweden’s Central Bank, Riksbank on Thursday hiked its benchmark rate by 50bps to 3.0 percent during its February meeting. The move followed the ECB’s 50bps move last week and was expected.
Banco de México raised interest rates by 50 basis points rather than the expected 25bps as January inflation accelerated for the second straight month. Peru’s BCRP surprised by holding its policy rate unchanged at 7.75% instead of a 25bps hike.
The most significant chatter on central bank watch is around the next BoJ boss. We have seen the hawkish market reaction to the surprise indication that Kazuo Ueda will be appointed as the next BoJ Governor. Kazuo Ueda is a former Professor and BoJ Board Member and is rumored to be appointed as the next BoJ Governor instead of Kuroda’s Deputy Governor Masayoshi Amamiya who they say declared he didn’t want the job anyway. Kuroda’s two deputies have been sacked also, out with the old and in with the new in Japan. The yen rallied on the chatter among crosses to the USD as it was taken as a hawkish signal.
“Kazuo Ueda, the surprise pick to become the Bank of Japan’s next governor, will be tasked with keeping confidence in the BOJ’s policy path without jarring global markets and heaping strain on the finances of a government that just can’t stop spending. Given the tricky mission ahead, Prime Minister Fumio Kishida was widely expected to opt for the safest pair of hands he could find: Masayoshi Amamiya… But instead Ueda, a university professor and MIT PhD, is now set for the top slot… ‘The Bank of Japan’s current policy is appropriate and monetary easing needs to be continued at this point,’ he told reporters Friday… There will be precious little patience awaiting Ueda when he takes the helm in April as market players wait for another opportunity to bombard the central bank’s stimulus program with the kind of attacks that toppled a similar yield-based framework in Australia. ‘It’s hard to overstate the challenge,’ said Takahiro Sekido, chief Japan strategist at MUFG Bank Ltd. in Tokyo and a former BOJ official.
‘Saying it’s a rough ride isn’t even close. The BOJ has done so much in the past decade and the policy got so complicated — so many markets will be affected by even a slight policy change’… ‘It is absolutely inevitable that the BOJ will have to dismantle its quantitative easing fairly quickly,’ says Amir Anvarzadeh, a strategist at Asymmetric Advisors…, who has tracked Japanese markets for three decades. ‘It’s coming’… In an illustration of just how costly the battle is proving, the BOJ shelled out in January more than three times the amount the government earmarked for additional defense spending in the coming fiscal year. With inflation at a four-decade high, a bond market showing signs of dysfunction and indications that wages are finally going up, the BOJ is running out of reasons to keep adding to a mountain of bond purchases that already outsizes the world’s third-largest economy.”
February 10 – Bloomberg (Toru Fujioka):
Eyes on the Bond Market
Longer-dated Treasuries ended the week on a firmly lower note while the 2-yr note outperformed, logging a modest gain. Philadelphia Fed President Harker (FOMC voter) said that the fed funds rate range should be above 5.00%. This week’s action tightened the 2s10s spread by another basis point to -77 bps.
Yield Watch
- 2-yr: -1 bp to 4.51% (+22 bps for the week)
- 3-yr: +2 bps to 4.20% (+23 bps for the week)
- 5-yr: +4 bps to 3.92% (+25 bps for the week)
- 10-yr: +6 bps to 3.74% (+21 bps for the week)
- 30-yr: +8 bps to 3.83% (+20 bps for the week)
Highlights – Federal Reserve
- Federal Reserve Credit declined $25.9bn last week to $8.398 TN.
- Fed Credit was down $503bn from the June 22nd peak.
- Over the past 178 weeks, Fed Credit expanded $4.671 TN, or 125%.
- Fed Credit inflated $5.587 Trillion, or 199%, over the past 535 weeks.
- Fed holdings for foreign owners of Treasury, Agency Debt last week rose $7.0bn to $3.332 TN.
- “Custody holdings” were down $134bn, or 3.9%, y-o-y.
Rate markets now have peak Fed funds at 5.19% for the July 26th FOMC meeting, compared to the previous week’s 5.03% at the June 14th meeting.
Fed 2023 Bank Stress Tests.
The Federal Reserve on Thursday released the hypothetical scenarios for its annual bank stress tests. This year, 23 banks will be tested against a severe global recession with heightened stress in both commercial and residential real estate markets, as well as in corporate debt markets. Last year the Fed found all 34 large banks tested remained well above their risk-based minimum capital requirements, and the Fed announced no restrictions relating to dividends and buybacks.
Central Bank Highlights This Past Week:
Most of the G10 central banks may complete their rate hike cycles around the middle of the year or earlier, the unwinding of central bank balance sheets may continue longer, depending on the damage done.
Central Bank Week Ahead:
In the week ahead we get two central banks delivering policy decisions.
- Bangko Sentral ng Pilipinas (BSP) on Thursday: The Monetary Board of the Bangko Sentral ng Pilipinas (BSP), Philippines central bank hiked by 50 basis points to 5.50% and follows a 75 basis-point increase at the last meeting.
- Bank Indonesia on Thursday: Bank Indonesia increased interest rates by 25 bps during the first meeting of 2023, a sixth consecutive hike, on Thursday as it sought to tame inflation and strengthen the rupiah exchange rate.
This Week’s Interest Rate Announcements (Time E.T.)
- Thursday, February 16, 2023
- 02:00 Pilipinas (BSP) Interest Rate Decision
- 02:30 Bank Indonesia Interest Rate Decision
This Week’s Central Bank Speeches, Meetings (Time E.T.)
Monday February 13, 2023
- None Seen
Tuesday, February 14, 2023
- 11:00 Fed Logan Speaks
- 14:05 FOMC Member Williams Speaks
Wednesday, February 15, 2023
- 09:00 ECB President Lagarde Speaks
Thursday, February 16, 2023
- 02:00 Pilipinas (BSP) Interest Rate Decision
- 02:30 Bank Indonesia Interest Rate Decision
- 04:15 ECB’s Panetta Speaks
- 08:45 FOMC Member Mester Speaks
- 10:00 ECB’s Lane Speaks
- 13:30 FOMC Member Bullard Speaks
- 14:45 ECB’s De Guindos Speaks
- 17:30 RBA Governor Lowe Speaks
- 18:00 FOMC Member Mester Speaks
Friday, February 17, 2023
- None Seen
Federal Reserve FOMC Schedule 2023
- January 31-February 1, 2023 (second day: statement released 1400 EST/1900 GMT; news conference expected 1430 EST/1930 GMT)
- March 21-22 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
- May 2-3 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
- June 13-14 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
- July 25-26 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
- September 19-20 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
- October 31-November 1 (second day: statement released 1400 EDT/1800 GMT; news conference expected 1430 EDT/1830 GMT)
- December 12-13 (second day: statement released 1400 EST/1900 GMT; news conference expected 1430 EST/1930 GMT)
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
2023
- ECB Raises Rates Another 50bps, Lagarde Says Another 50bps in March
- Bank of England Raises Interest Rates 50bps to 4.0%, Projects Inflation Likely Peaked
- Hong Kong’s Monetary Authority Raised Interest Rates 25bps Lockstep with US Federal Reserve
- Brazil Central Bank Left Rates Steady for Fourth Month at 13.75%, Cautious Due to Fiscal Risk
- Federal Reserve Raises Rates 25bps as Expected, Disinflationary Process has Started
- Bank of Canada Hikes Rates 25 bps to Highest Level Since 2008, Signals Holding Pattern
- Norway Holds Interest Rate at 2.75 percent, Signaled More Hikes Ahead
- Turkey Central Bank Left Interest Rates Unchanged at 9% As Lira Hits New Lows
- Bank Negara Malaysia Leaves Interest Rates Unchanged to Assess Previous Hikes Impact
- Bank Indonesia Raised Rates Another 25 basis points to Highest Level Since 2009
- Federal Reserve Beige Book Highlights Housing Markets Continued to Weaken
- Dollar Yen Soars After Bank of Japan Keeps Monetary Policy Steady, No Change to JGB Yield Band
- Bank of Korea Raises Rates To 3.50%, Highest level Since August 2008
2022
- Turkey Central Bank Cuts Left Interest Rates Unchanged at 9%, Bond Yield Hits Six Year Low
- Bank Indonesia Raised Rates by 25 basis points to Highest Level Since 2009
- Yen Soars After Bank of Japan Mini Pivot Widens Yield Curve Control Band
- 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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Sources: TC WSJ Bloomberg Scotia Bank
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