Central banks responded as expected this past week which gave relief to stock and bond markets. The big three central banks, the Federal Reserve (Fed), Bank of England (BOE) and European Central Bank (ECB) all delivered more rate hikes as expected. The Banco Central do Brasil as expected kept the Selic rate at 13.75% which is where it has been since last August. The Hong Kong Monetary Authority (HKMA), Hong Kong’s de-facto central bank, raised its benchmark interest rate, following the US Federal Reserve, by 25 basis points to 5.00% on Thursday.
In the week ahead we get five central banks delivering policy decisions. Australia, India Mexico, Sweden, and Peru. 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 big three central banks, the Federal Reserve (Fed), Bank of England (BOE) and European Central Bank (ECB) all delivered more rate hikes as expected. The Banco Central do Brasil as expected kept the Selic rate at 13.75% which is where it has been since last August. The Hong Kong Monetary Authority (HKMA), Hong Kong’s de-facto central bank, raised its benchmark interest rate, following the US Federal Reserve, by 25 basis points to 5.00% on Thursday.
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 dropped $20.5bn last week to $8.447 TN.
- Fed Credit was down $454bn from the June 22nd peak.
- Over the past 176 weeks, Fed Credit expanded $4.720 TN, or 127%.
- Fed Credit inflated $5.636 Trillion, or 201%, over the past 533 weeks.
- Fed holdings for foreign owners of Treasury, Agency Debt last week fell $9.9bn to $3.321 TN.
- “Custody holdings” were down $137bn, or 4.0%, y-o-y.
The fed funds futures market is now accounting for the prospect of a third 25 basis point rate hike in May. According to the CME FedWatch Tool, the probability of a rate hike in May, in addition to the one that is fully priced in for March, increased to 61.8% from 30.0% yesterday.
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.
- RBA meeting on Tuesday Consensus expects another 25bps hike. Markets are mostly priced for a quarter point. The central bank had suggested that a pause was considered at the prior meeting in December which makes this call less certain. There was a strong upside surprise to Australian inflation not only in Q4 but also for the final month of the year. There may be pause guidance at this meeting, but the hot inflation figures and China rebound narrative challenge whether the RBA should instead keep its options open.
- RBI on Wednesday: Most economists expect another 25bps hike from the RBI. That would take the repo rate up to 6 ½% for a cumulative increase of 225bps since policy tightening began last April. OIS markets are priced for most of a quarter-point hike. Key is whether the Monetary Policy Committee will continue to vote in favour of further withdrawal of policy accommodation after a 4–2 vote in favour of doing so in December, or whether it may signal a hard pause. While headline inflation subsequently ebbed, core inflation remains resilient. Then there is the Adani matter.
- Riksbank on Thursday: Sweden’s central bank is likely to follow the ECB’s 50bps hike with one of its own on Thursday. Markets are priced for it and most of consensus is onside. Key will be forward guidance offered in the fresh Monetary Policy Report’s published forward rate path.
- Banxico on Thursday: Mexico’s central bank is expected to hike its overnight rate by 25bps on Thursday and therefore continue to match the Fed’s moves. A very strong US jobs report and other strong data like ISM-services and vehicle sales could also be taken as signals of a strong set of external conditions to merit additional policy tightening.
- Peru on Thursday: Consensus expects BCRP to hike by another 25bps on Thursday. The pick-up in January’s inflation reading was less than expected, but it still accelerated to 8.7% y/y with the core rate of inflation rising to 5.8% y/y. “Protests in the southern part of the country where key resource riches lie complicate the outlook for the economy and inflation including bottleneck pressures. The sol has depreciated a touch further since the last policy decision on January 12th which may keep alive concern about import-price passthrough effects.”
This Week’s Interest Rate Announcements (Time E.T.)
- Monday February 6, 2023
- 22:30 RBA Interest Rate Decision
- Tuesday, February 7, 2023
- 23:30 India Interest Rate Decision
- Thursday, February 8, 2023
- 03:30 Sweden Interest Rate Decision
- 14:00 Mexico Interest Rate Decision
- 18:00 Peru Interest Rate Decision
This Week’s Central Bank Speeches, Meetings (Time E.T.)
Monday February 6, 2023
- 03:40 BoE MPC Member Mann
- 12:00 BoE MPC Member Pill Speaks
- Tentative USD Loan Officer Survey
- 13:00 ECB President Lagarde Speaks
- 22:30 RBA Interest Rate Decision
- 22:30 RBA Rate Statement
Tuesday, February 7, 2023
- 04:00 MPC Member Ramsden Speaks
- 05:15 MPC Member Pill Speaks
- 06:00 BCB Copom Meeting Minutes
- 10:00 BoE MPC Member Cunliffe Speaks
- 12:00 ECB’s Schnabel Speaks
- 12:40 Fed Chair Powell Speaks
- 12:45 BoC Gov Macklem Speaks
- 14:00 Fed Vice Chair for Supervision Barr Speaks
- 19:30 RBA Chart Pack Release
- 23:30 India Interest Rate Decision
Wednesday, February 8, 2023
- 03:30 German Buba Balz Speaks
- 04:00 ECB’s Elderson Speaks
- 07:45 German Buba Balz Speaks
- 09:15 FOMC Member Williams Speaks
- 09:45 German Buba Wuermeling Speaks
- 10:00 Fed Vice Chair for Supervision Barr Speaks
- 13:45 Fed Waller Speaks
Thursday, February 9, 2023
- 03:30 Sweden Interest Rate Decision
- 04:45 BoE MPC Treasury Committee Hearings
- 11:00 German Buba Mauderer Speaks
- 12:00 EUR Buba President Nagel Speaks
- 13:00 ECB’s De Guindos Speaks
- 14:00 Mexico Interest Rate Decision
- 18:00 Peru Interest Rate Decision
- 19:30 RBA Monetary Policy Statement
Friday, February 10, 2023
- 09:00 BoE MPC Member Pill Speaks
- 09:00 ECB’s Schnabel Speaks
- 16:00 FOMC Member Harker Speaks
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
For a Complete Macro and Micro Market Overview Visit Our Traders Market Weekly
Sources: TC WSJ Bloomberg Scotia Bank
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