This week’s central bank main event was The Bank of Canada who hiked by 25bps to 4.50%. The Bank of Thailand raised its key interest rate by 25 basis points to 1.5%. Colombia’s BanRep hiked by 75bps but signaled the end of cycle nearing. Chile left their benchmark at 11.25% with a neutral bias. South Africa hiked the repo rate by 25bp to 7.25%. In the week ahead we get four central banks delivering policy decisions. We have the big central bank triple header, the Federal Reserve (Fed), Bank of England (BOE) and European Central Bank (ECB) all set to deliver more rate hikes. The Banco Central do Brasil on Wednesday is expected to keep the Selic rate at 13.75% which is where it has been since last August.
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 Bank of Canada who hiked by 25bps to 4.50%. The Bank of Thailand raised its key interest rate by 25 basis points to 1.5%. Colombia’s BanRep hiked by 75bps but signaled the end of cycle nearing. Chile left their benchmark at 11.25% with a neutral bias. South Africa hiked the repo rate by 25bp to 7.25%.
A look at Powell and the FOMC
Markets have priced in a 4.90% expected (near) peak Fed funds rate at the May 3rd FOMC meeting, dismissing committee members’ calls for a 5% plus “terminal rate.” Markets discount a Fed pivot and the policy rate down to 4.47% by year end.
Chair Powell missed an opportunity to throw some hawkish cold water on market speculation during his Stockholm speech on the 10th. Speculative markets have become increasingly detached from the Fed’s inflation-fighting narrative. Powell’s hawkish inflation chatter is now well-worn, perhaps until next time.
At his December press conference, Powell when asked about downshifting and loosely intimated as such:
“I can’t tell you that today. We’re into restrictive territory and it’s not so important how fast we go. It’s far more important to determine how high we go and how long we should stay there.”
If Powell wants to play hard it will take something like his November 1st hawkish smack down. Our thoughts are his discomfort with the 3.5% market wreckage led to a disciplined “balanced Powell.” Powell needs to temper the speculative oblivious disconnect however, how does he slow it down? Market control of financial conditions feeds wild “risk on” / “risk off” instability.
We had a Fed Black Out this week, so let’s revisit the last Fed Speakers of note:
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.
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 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.
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.
- Bank of Thailand hiked of 25bps hike to 1.5% as expected.
- Bank of Canada raised the target for its overnight rate by 25bps to 4.50% in January 2022, as expected. The BoC issued its policy statement and Monetary Policy Report with fresh forecasts followed by the 11amET press conference hosted by Governor Macklem and SDG Rogers.
- Chile BCCh left their benchmark at 11.25% with a neutral bias.
- South Africa SARB hiked the repo rate by 25bp to 7.25% with some evidence that inflation is peaking.
- Colombia’s BanRep hiked by 75bps but signaled the end of cycle nearing.
Central Bank Week Ahead:
In the week ahead we get four central banks delivering policy decisions.
- FOMC meeting on Tuesday and Wednesday with the statement at 2pmET followed by Chair Powell’s press conference starting at 2:30pmET. There will be no updated Summary of Economic Projections, or its dot plot offered at this meeting with the next chance at updating all of that arriving on March 22nd. A 25bps rate hike is widely expected among economists and fed funds futures are priced for it. Tail risks are low. There has been no signal offered by FOMC officials that they are open to a pause, nor has there been guidance toward a bigger 50bps move which would be the slightly fatter tail risk.
- Banco Central do Brasil on Wednesday: Another hold is expected with the Selic rate staying at 13.75% which is where it has been since last August. Inflation has been rapidly tumbling but markets are now more uncertain toward the timing and pace of possible future easing. A major reason for this is the change of administration to President Luiz Inacio Lula da Silva (“Lula”) and the uncertainty this has created around fiscal policy while also questioning the independence of the central bank.
- ECB on Thursday: Consensus and markets are priced for a 50bps hike in each of the ECB’s main policy rates. This is in keeping with most ECB guidance including from President Lagarde during her prior press conference in December. Expect Lagarde to guide that another 50bps hike lies ahead at the March meeting.
- Bank of England on Thursday: Most within consensus expect the BoE to hike by another 50bps. A significant minority expects a quarter-point hike. This same division is reflected in market pricing that is roughly sitting on the fence between the two scenarios. High inflation will probably keep the BoE on track with a larger move. Markets are also pricing a terminal rate of up to 4 ½% compared to Bank Rate going into this meeting that is presently set at 3.5%.
This Week’s Interest Rate Announcements (Time E.T.)
- Wednesday, February 1, 2023
- 14:00 Fed Interest Rate Decision
- 16:00 BRL Interest Rate Decision
- Thursday, February 2, 2023
- 07:00 BoE Interest Rate Decision
- 08:15 ECB Interest Rate Decision
This Week’s Central Bank Speeches, Meetings (Time E.T.)
NB: Federal Reserve in Blackout Period
Monday January 30, 2023
- 21:00 Singapore Bank Lending
Tuesday January 31, 2023
- 04:00 ECB Bank Lending Survey
- 06:30 RBI Monetary and Credit Information Review
Wednesday, February 1, 2023
- 14:00 FOMC Statement
- 14:00 Fed Interest Rate Decision
- 14:30 FOMC Press Conference
- 16:00 BRL Interest Rate Decision
Thursday, February 2, 2023
- 07:00 BoE Interest Rate Decision
- 07:00 BoE MPC Meeting Minutes
- 08:15 ECB Monetary Policy Statement
- 08:15 ECB Interest Rate Decision
- 08:45 ECB Press Conference
- 09:15 BoE Gov Bailey Speaks
- 10:15 ECB President Lagarde Speaks
- 12:30 SNB Chairman Thomas Jordan speaks
- 13:30 ECB President Lagarde Speaks
Friday, February 3, 2023
- 03:30 SNB Gov Board Member Maechler Speaks
- 07:15 BoE MPC Member Pill 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
- 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
- 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
From The TradersCommunity Research Desk