Central bankers continued their hawkish tilt for the most part all week. Though Fed’s Bostic gave the stock and bond markets relief when he said he’s firmly in the 25bps camp for rate hike pace (as opposed to 50bps). There were no major Central Bank decisions. The Pakistan Central Bank (SBP) hiked 300bps to 20% saying the IMF required the rate hike to get funding released. Emerging markets are caught in a never-ending loop brought to you by their bankers. The week ahead is a busy week for Central Bank decisions, we get key monetary policy meeting, from Australia’s RBA, Canada’s BoC and Japan’s BoJ all with Interest Rate Decisions.
For the US we get Federal Reserve Chair Jerome Powell delivering his semiannual monetary policy testimony before the Senate Banking, Housing and Urban Affairs Committee, then the next day he is before the House Financial Services Committee. The National Bank of Poland, BCRP (Peru) and Bank Negara (Malysia) round out the central bank calendar.
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 events included:
- Fed’s Logan on market disfunction
-Central bank interventions in Treasuries should be rare
-Need to clarify terms of bond buying when done for market support
-The Fed still hasn’t solved the problems that caused it to pledge to buy - People’s Bank of China Governor Yi Gang said that real interest rates in China are at an appropriate level at this time.
- Reserve Bank of New Zealand Governor Orr said that early signs of easing price pressures have been spotted.
- Atlanta Fed President Bostic Won’t decide until meeting on the proper path of policy, Have seen ‘some attenuation’ on inflation but Fed needs to remain ‘resolute’ in fighting high prices, Says he’s firmly in the 25 bps camp for rate hike pace and says policy should begin to bite in the spring, Fed does not “do more than we need to”
- Bank of England chief economist Pill: Some high-frequency indicators of wages have fallen quite sharply recently. Survey indicators that have become available since the publication of the forecast have surprised to the upside, suggesting that the current momentum in economic activity may be slightly stronger than anticipated.
- Bank of Japan policymaker Takata repeated that ultra-loose policy must be maintained.
- JGB market survey conducted by the BoJ noted that the market is functioning at its worst level since the series began in 2015.
- Minneapolis Fed President Neel Kashkari (voting FOMC member) says he is leaning towards pushing up rate policy path; says recent month’s inflation data was concerning; says the debate over 25 or 50 is less important to him
- Atlanta Fed President Bostic (not a voting FOMC member) says that inflation is still too high and its not time to ease; says rates should go to 5.00-5.25% and hold – CNBC
- ECB policymaker Villeroy de Galhau said that it is desirable to reach the terminal rate by the summer and that growth in France is expected to be slightly positive in 2023.
- Bank of England Governor Bailey said that additional rate hikes may be appropriate, but nothing has been decided yet.
Eyes on the Bond Market
U.S. Treasuries rose Friday lifting the long bond into positive territory for the week while shorter tenors recovered some of their losses from the past two days. The eurozone’s PPI decreased 2.8% in January against expectations for a much smaller dip, slowing the yr/yr growth rate to 15.0% from 24.6% in December. Another week of underperformance in the 2-yr note, putting more pressure on the 2s10s spread, which tightened by seven basis points to -90 bps. Crude oil bounced back to its February high as the day went on while the U.S. Dollar Index fell 0.5% to 104.50, losing 0.7% for the week.
Yield Watch
- 2-yr: -5 bps to 4.86% (+8 bps for the week)
- 3-yr: -4 bps to 4.60% (+9 bps for the week)
- 5-yr: -7 bps to 4.25% (+4 bps for the week)
- 10-yr: -11 bps to 3.96% (+1 bp for the week)
- 30-yr: -13 bps to 3.89% (-5 bps for the week)
Highlights – Federal Reserve
- Federal Reserve Credit dropped $44.3bn last week to $8.349 TN.
- Fed Credit was down $552bn from the June 22nd peak.
- Over the past 180 weeks, Fed Credit expanded $4.622 TN, or 124%.
- Fed Credit inflated $5.538 Trillion, or 197%, over the past 537 weeks.
- Fed holdings for foreign owners of Treasury, Agency Debt rose $6.6bn last week to $3.353 TN.
- “Custody holdings” were down $105bn, or 2.8%, y-o-y.
Rate markets saw Fed rate hike expectations continued to creep higher and is now pricing peak Fed funds at 5.40% for the June 24th FOMC meeting, up 12 bps this week and 56 bps since February 2nd. Expectations for the December meeting policy rate jumped 22 bps this week (up 88bps in three weeks) to 5.28%. Market pricing now has consecutive rate increases at the March, May and June FOMC meetings, with about a 20% probability for a 50-bps hike next month.
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.
- Pakistan Central Bank (SBP) raises 300bps to 20% Inflation in Pakistan is up 31.5% in Feb, 50 year highs. IMF required the rate hike to get funding released
Central Bank Week Ahead:
In the week ahead we have key monetary policy meeting, from Australia’s RBA, Canada’s BoC and Japan’s BoJ all with Interest Rate Decisions. For the US we get Federal Reserve Chair Jerome Powell delivering his semiannual monetary policy testimony before the Senate Banking, Housing and Urban Affairs Committee, then the next day he is before the House Financial Services Committee, The National Bank of Poland, BCRP (Peru) and Bank Negara (Malysia) round out the central bank calendar.
In the week ahead we get three central banks delivering policy decisions.
This Week’s Interest Rate Announcements (Time E.T.)
- Monday, March 6, 2023
- 22:30 RBA Interest Rate Decision (Mar)
- Wednesday, March 8, 2023
- 10:00 National Bank of Poland Interest Rate Decision
- 10:00 BoC Interest Rate Decision
- Thursday, March 9, 2023
- 02:00 Bank Negara (Malysia) Interest Rate Decision
- 18:00 BCRP (Peru) Interest Rate Decision
- 21:30 BoJ Interest Rate Decision
This Week’s Central Bank Speeches, Meetings (Time E.T.)
Monday, March 6, 2023
- 22:30 RBA Interest Rate Decision (Mar)
Tuesday, March 7, 2023
- 10:00 Federal Reserve Chair Jerome Powell delivers semiannual monetary policy testimony before the Senate Banking, Housing and Urban Affairs Committee, Livestreamed at https://www.banking.senate.gov/
- 16:55 RBA Governor Lowe Speaks
- 19:30 RBA Chart Pack Release
Wednesday, March 8, 2023
- 08:00 Federal Reserve Bank of Richmond President Thomas Barkin speaks before the Transforming South Carolina 2023 Nonprofit Summit, 0800 No livestream. No text. Audience Q&A expected.
- 10:00 National Bank of Poland Interest Rate Decision
- 10:00 BoC Interest Rate Decision
- 10:00 Federal Reserve Chair Jerome Powell delivers semiannual monetary policy testimony before the House Financial Services Committee. Text available. Livestream at https://financialservices.house.gov/.
Thursday, March 9, 2023
- 02:00 Bank Negara (Malysia) Interest Rate Decision
- 10:00 Federal Reserve Vice Chair for Supervision Michael Barr speaks on “Crypto” before the Peterson Institute for International Economics, Text available. Q&A from moderator. Livestream at https://www.youtube.com/user/PetersonInstitute.
- 18:00 BCRP (Peru) Interest Rate Decision
- 21:30 BoJ Interest Rate Decision
Friday, March 10, 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
- Reserve Bank of New Zealand Raise Rates by 50bp to 4.75% to Highest Since January 2009
- Banco de México Raises Rates by 50 bps to Record High 11.00%, Reacts to Higher Inflation
- Federal Reserve Hypotheticals For 2023 Bank Stress Tests have Unemployment at 10%
- Sweden’s Riksbank Raise Rates by 50 bps, Moves to Strengthen Krona
- Reserve Bank of India Hike Rates Sixth Time in a Row to 6.50%
- RBA Raises Rates to Ten Year High 3.35%, says Futher Hikes Ahead
- 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
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