Central Bank Watch – Fed Tempers Rhetoric, Bank of Canada Ahead

This week’s central bank main event was The Bank of Japan who kept the status quo sending the dollar yen up 300 pips putting a bid inequities and bonds. We saw no change from the People’s Bank of China, Norges Bank, Bank Negara Malaysia Bank, and Central Bank of Turkey from their monetary policy meetings. Bank Indonesia however raised another 25bps. The Federal Reserve Biege Book was consistent with what we have seeing with economic data released, not a lot has changed over the past month, the economy is weakening. In the week ahead we get five central banks delivering policy decisions. Canada, Thailand, Chile, Columbia and South Africa.

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

Fed Speakers spoke consistently through the week, going into blackout at Friday’s close until the next FOMC. Some would say thankfully. Noticeable was the stepping down of aggressive hikes, nonetheless, still warning about inflation and the market is wrong. Some noticeable outtakes:

Boston Fed president Susan Collins: “Now that rates are in restrictive territory and we may, based on current indicators, be nearing the peak, I believe it is appropriate to have shifted from the initial expeditious pace of tightening to a slower pace.”

Not that quick though, Fed hawkish commentary this week:

  • Brainard: “Inflation remains high, and policy will need to be sufficiently restrictive for some time…”
  • Williams: “With inflation still high and indications of continued supply-demand imbalances, it is clear that monetary policy still has more work to do…”
  • Bullard stated his desire to get rates above 5% “as quickly as we can.”

Markets are pricing in a (near) “terminal rate” 4.89% for the FOMC’s May 3rd meeting. Rates are then expected to reverse lower to 4.42% at the December 13th meeting. Markets are not aligned with the Fed.

Signals out of the ECB this week were strikingly inconsistent.

  • Tuesday (Bloomberg): “European Central Bank policymakers are starting to consider a slower pace of interest-rate hikes than President Christine Lagarde indicated in December, according to officials with knowledge…”
  • Thursday (Bloomberg): “European Central Bank Governing Council member Klaas Knot said there’ll still be more than one half-point increase in interest rates…”
  • Friday (WSJ quoting Lagarde): “China’s abandonment of its zero-Covid policy is good news for global economic growth… ‘That is positive for the rest of the world, but there will be more inflationary pressure.’” European bonds were hit Friday.

Confused yet? You know they are!

Eyes on the Bond Market

We continue keep eyes on the bond market, as we have said the US 10-year Treasury peaked around 4.33% on the same day as the US dollar peaked against the yen USDJPY 151.95 on October 21. The BOJ had spent billions intervening and by the time the BOJ met late last month and surprised the market with the Yield control change the 10-year yield was consolidating after falling to around 3.40%, and the dollar was in a range between JPY134-JPY138.

Highlights – Federal Reserve

  • Federal Reserve Credit declined $4.3bn last week to $8.467 TN.
  • Fed Credit was down $434bn from the June 22nd peak.
  • Over the past 175 weeks, Fed Credit expanded $4.741 TN, or 127%.
  • Fed Credit inflated $5.656 Trillion, or 201%, over the past 532 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt slipped $1.0bn last week at $3.331 TN.
  • “Custody holdings” were down $116bn, or 3.4%, y-o-y.

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 five central banks delivering policy decisions.

  • The Bank of Canada on Wednesday updates with its policy statement and Monetary Policy Report with fresh forecasts (10amET) followed by the 11amET press conference hosted by Governor Macklem and SDG Rogers. Markets are almost fully priced for a 25bps rate hike. All of the big domestic banks’ economics analysts expect a 25bps hike. Scotiabank is allows: “I would assign 55% odds to a 25bps hike, 35–40% odds to a pause and we can’t fully shut the door to a hawkish surprise as a low probability but high impact tail risk.
  • Bank of Thailand on Wednesday: A hike of 25bps hike to 1.5% is expected. Inflation climbed further in December to 5.9% y/y with core inflation at 3 ¼% y/y, both above the BoT’s 2% inflation target.
  • Chile’s BCCh on Thursday: Consensus almost universally expects another policy rate hold at 11.25% where it has been since October. Inflation has started to ease in y/y terms to 12.8% y/y from a peak of 14.1%.
  • South Africa’s SARB on Thursday: “The South African Reserve Bank is expected to hike again on Thursday, but consensus is split between +25bps and +50bps with markets leaning closer to the former.” There is some evidence that inflation is peaking.
  • Colombia’s BanRep on Friday: Another mega-hike is expected to be delivered. “Consensus is somewhat divided on the call with eleven voices expecting +100 including Scotia’s Bogota-based economist, five forecasters expecting 75bps and a couple expecting a 50bps hike.” Inflation continues to surprise higher as evidenced by December’s reading (13.1% y/y, 12.7% consensus) with core CPI at 10% y/y which is the highest in modern records.

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

Tuesday January 24, 2023

  • 02:00 Bank of Thailand Interest Rate Decision

Wednesday January 25, 2023

  • 10:00 BoC Interest Rate Decision

Thursday January 26, 2023

    • 08:00 SARB Interest Rate Decision
    • 16:00 Chile’s BCCh Interest Rate Decision

    Friday January 27, 2023

    • 15:00 Colombia’s BanRep Interest Rate Decision

    This Week’s Central Bank Speeches, Meetings (Time E.T.)

    NB: Federal Reserve in Blackout Period

    Monday January 23, 2023

    • Tentative EUR German Buba Monthly Report

    Tuesday January 24, 2023

    • 02:00 Bank of Thailand Interest Rate Decision
    • 11:30 SNB Vice Chairman Schlegel Speaks

    Wednesday January 25, 2023

    • 10:00 BoC Monetary Policy Report
    • 10:00 BoC Interest Rate Decision
    • 11:00 BOC Press Conference
    • 18:50 BoJ Summary of Opinions

    Thursday January 26, 2023

    • 08:00 SARB Interest Rate Decision
    • 08:00 SARB Prime Rate
    • 16:00 Chile’s BCCh Interest Rate Decision

    Friday January 27, 2023

    • 15:00 Colombia’s BanRep Interest Rate Decision

    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

    2022

    For a Complete Macro and Micro Market Overview Visit Our Traders Market Weekly

    Sources: TC WSJ Bloomberg Scotia Bank

    Trade Smart

    From The TradersCommunity Research Desk