Central Bank Watch – Fed, ECB and BoE Triple Play

A huge week for Bankers, we have 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. The FOMC will also include an updated Summary of Economic Projections that will provide some insight on terminal rate projections.  Monetary policy meetings also ahead from the Philippines, Swiss National Bank and the Bank of Mexico. We get the US, UK, India, and South Africa all releasing inflation data also.

Last week we got rate hikes from India’s RBI, Australia’s RBA and the Bank of Canada. The Central Banks of Brazil and Poland left rates unchanged.

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

The big story this week for rate watchers was Friday’s US PPI report creating some angst ahead of next week’s Consumer Price Index. We also had an above-consensus preliminary reading of the University of Michigan’s Consumer sentiment survey for December. The news comes after the previous week’s Fed chair Powell’s speech at the Brooking institute.

With Fed Chair Powell at the Brooking Institute last Wednesday not being uber hawkish, especially compared to his November 2nd press conference sent stock and bonds soaring, clearly catching many bears short. Recall back at that November presser the S&P500 sank about 5% between the start of his press conference and the following day’s market open.

Fast forward this week and we have had a slew of strong economic reports, thought plenty of recession hints such as layoffs and bankruptcies to balance those out.

Back to Powell’s Brooking speech if we are right that there was a tilt to his dovish vice chair then nothing too deep this week. Recall “monetary policy works with long and variable lags.” “I don’t want to overtighten. My colleagues and I do not want to overtighten…” Compared to the hawkish Powell, from his November FOMC press conference, “if we over tighten, then we have the ability with our tools, which are powerful, to… support economic activity strongly.”

We can probably assume Powell was uncomfortable that his comments at the FOMC Q&A had such a market impact, or he is just being forthright in his adjustment to events. Regardless, what he did say was on Wednesday was “So, we have a risk management balance to strike, and we think that slowing down at this point is a good way to balance the risks of over tightening.” 

Highlights – Federal Reserve

  • Federal Reserve Credit declined $22.6bn last week to $8.546 TN. Fed Credit was down $354bn from the June 22nd peak.
  • Over the past 169 weeks, Fed Credit expanded $4.820 TN, or 129%. Fed Credit inflated $5.736 Trillion, or 204%, over the past 526 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt last week fell $5.5bn to $3.307 TN – the low since June 2017. “Custody holdings” were down $139bn, or 4.0%, y-o-y.
  • Total money market fund assets jumped $47.7bn to $4.718 TN – the high since June 2020. Total money funds were up $82.4bn, or 1.8%, y-o-y.
  • Total Commercial Paper surged $24.8bn to $1.318 TN – the high since November 2009. CP was up $229bn, or 21.0%, over the past year.

More Central Bank News of Note This Week:

Central Bank Week Ahead:

The most notable events are the Federal Reserve (Fed), Bank of England (BOE) and European Central Bank (ECB) will all deliver their last meeting of 2022. Since the last meetings at the beginning of November risk sentiment has improved significantly, though we have seen a pullback this past week there. The US dollar dropped to 6-month lows and oil has collapsed to near $70 from over $120 back in the first quarter. The banks have the job of balancing still high, but receding inflation and a global recession in the first half of 2023.

This Week’s Interest Rate Announcements (Time E.T.)

  • Federal Reserve – Wednesday December 14th 14:00
  • Bangko Sentral ng Pilipinas – Thursday December 15th 02:00
  • Swiss National Bank – Thursday December 15th 03:30
  • Norges Bank – Thursday December 15th 04:00
  • Bank of England – Thursday December 15th 07:00 
  • European Central Bank – Thursday December 15th 08:15
  • Banco de México – Thursday December 15th 14:00
  • Russian Central bank – Friday December 16th 05:30

In addition to the big three central banks, we get the Swiss National Bank, the Norges Bank, and the Central Bank of the Russian Federation updating monetary policy in Europe. In the Americas Mexico’s Central Bank will announce its monetary policy decision.

Monday, Dec. 12

  • 06:00 EUR ECB’s Supervisory Board Member Jochnick Speaks
  • 15:25 BoC Gov Macklem Speaks
  • 20:00 BOK Financial Stability Board Meeting Minutes

Tuesday, Dec. 13

  • 05:30 BoE Financial Stability Report
  • 05:30 BoE FPC Meeting Minutes
  • 06:00 BoE Gov Bailey Speaks
  • 17:30 RBA Governor Lowe Speaks

Wednesday, Dec. 14

  • 14:00 FOMC Statement
  • 14:00 Fed Interest Rate Decision
  • 14:00 Interest Rate Projection – 1st Yr 2nd Yr Current (Q4) Longer (Q4)
  • 14:00 FOMC Economic Projections
  • 14:30 FOMC Press Conference
  • 17:30 ECB’s Elderson Speaks

Thursday, Dec. 15

  • 02:00 Bangko Sentral ng Pilipinas Interest Rate Decision
  • 03:00 SARB Quarterly Bulletin
  • 03:30 SNB Interest Rate Decision
  • 03:30 SNB Monetary Policy Assessment
  • 04:00 Norges Bank Interest Rate Decision
  • 04:00 SNB Press Conference
  • 07:00 BoE Interest Rate Decision
  • 07:00 BoE MPC Meeting Minutes
  • 08:15 ECB Monetary Policy Statement
  • 08:15 ECB Interest Rate Decision
  • 08:15 ECB Marginal Lending Facility
  • 08:45 ECB Press Conference
  • 10:15 ECB President Lagarde Speaks
  • 14:00 Banco de México Interest Rate Decision

Friday, Dec. 16

  • 05:30 CBR Interest Rate Decision
  • Tentative GBP BoE Quarterly Bulletin

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 75 basis-points last meeting. Their last forecast showed rates reaching 4.4% by year end from a current target range of 3% to 3.25% and to 4.6% in 2023. 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)

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Sources: TC WSJ Bloomberg

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