In the past week we heard from the big guns at the European Central Bank two-day Sintra conference. ECB President Lagarde maintained a hawkish tone in remarks. Bank of England Governor Bailey acknowledged the persistence of inflation, adding that the domestic economy has been more resilient than expected. Fed Chair Powell said he doesn’t think core inflation will be back to 2.0% until 2025. The Federal Reserve’s released its annual bank stress test results, which all 23 banks taking the test passed. Sweden’s Riksbank raised rates by 25 bps. In the week ahead we get the RBA, who on May 2nd and June 6th surprised consensus with 25bps hikes. We also get the Polish Central Bank and Bank Negara Malaysia rate decisions. Minutes to the June 13th–14th Fed meeting are out, is there anything to suprise?
Central Bank Weekly Analysis and Outlook – Banker dynamics are complex. There are myriad facets to analyze and contemplate.
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.
In the Week Ahead
After aggressive hawkish central bank action over the past weeks we seem to be back to the ‘villains’ who started it all, the RBA meeting is this week. On May 2nd and June 6th, the Reserve Bank of Australia surprised consensus with 25bps hikes. Now here we go again with consensus once again expected no change to the cash rate of 4.1% this Tuesday but with markets pricing a return to hiking later.
FOMC minutes to the June 13th–14th meeting are released on Wednesday at 2pmET. What we know is there was widespread agreement on the Committee that at least two more rate hikes are likely this year. Key may be the possibility that hiking in July could be signaled using some variant of ‘soon’ language that has been employed in the past. Markets are mostly priced for a 25bps hike on July 26th. Whether they compress the two hikes shown in the dot plot into back-to-back decisions is a key with Chair Powell’s recent remarks versus the uncertainty that accompanies being data dependent.
On Friday we saw the PCE Price Index growth rate slowed to a two-year low of 3.8% yr/yr from 4.3% in April while core PCE was up 4.6% yr/yr, down from 4.7% in April. This week’s action compressed the 2s10s spread by another five basis points, sending it to -106 bps.
We also get monetary from Bank Negara Malaysia who surprisingly raised its overnight policy rate by 25 bps at its last meeting. Poland is also out with their rate setting meeting.
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.
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.
This week’s central bank main events included:
- Sweden’s Riksbank Raise Rates by 25 bps, Krona Falls to New Record Low Against Euro.
- There was the release of the Federal Reserve’s annual bank stress test results, which all 23 banks taking the test passed.
- The Bank of Japan’s Summary of Opinions from the June meeting showed that at least one policymaker is open to reviewing yield curve control policy.
- European Central Bank policymakers are increasingly concerned about second-round effects of inflation and a wage-price spiral taking hold.
- European Central Bank President Lagarde maintained a hawkish tone in remarks made at the two-day Sintra conference.
- Bank of England Governor Bailey acknowledged the persistence of inflation, adding that the domestic economy has been more resilient than expected.
- Fed Chair Powell said he doesn’t think core inflation will be back to 2.0% until 2025.
Eyes on the Bond Market
U.S. Treasuries closed out the second quarter with yields on the 10-yr note and shorter tenors near levels not seen since the first half of March. On Friday there was some support from The PCE Price Index growth rate slowed to a two-year low of 3.8% yr/yr from 4.3% in April while core PCE was up 4.6% yr/yr, down from 4.7% in April. This week’s action compressed the 2s10s spread by another five basis points, sending it to -106 bps. The 2s10s spread compressed by 31 bps in June and 49 bps in Q2.
Treasuries completed this week’s note auctions with excellent demand for the $35 bln 7-yr note auction. We also completed a $43 bln 5-yr note auction and a $42 bln 2-yr note A rated auction.
Treasury borrowings will now be playing catch up. Treasury Q1 issuance slowed to $124 billion to a record $26.956 TN. Outstanding Treasury debt surged $7.937 TN, or 41.7%, over the past 13 quarters. Since the end of 2007, Treasury debt has inflated $20.905 TN, or 345%. After ending 2007 at 41%, Treasury debt closed the quarter at 102% of GDP.
Yield Watch
Friday/Week/Month/Quarter
- 2-yr: UNCH at 4.88% (+13 bps for the week; +49 bps in June; +82 bps in Q2)
- 3-yr: -2 bps to 4.49% (+16 bps for the week; +45 bps in June; +66 bps in Q2)
- 5-yr: -1 bp to 4.13% (+13 bps for the week; +39 bps in June; +52 bps in Q2)
- 10-yr: -4 bps to 3.82% (+8 bps for the week; +18 bps in June; +33 bps in Q2)
- 30-yr: -6 bps to 3.86% (+4 bps for the week; UNCH in June; +17 bps in Q2)
Highlights – Federal Reserve
- Federal Reserve Credit declined $17.2bn last week to $8.318 TN.
- Fed Credit was down $583bn from the June 22nd, 2022, peak.
- Over the past 198 weeks, Fed Credit expanded $4.591TN, or 123%.
- Fed Credit inflated $5.507 TN, or 196%, over the past 555 weeks.
- Fed holdings for foreign owners of Treasury, Agency Debt rose $7.0bn last week to $3.432 TN.
- “Custody holdings” were up $42bn, or 1.2%, y-o-y.
Fed 2023 Bank Stress Tests.
The Federal Reserve released the hypothetical scenarios for its annual bank stress tests before hand. 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.
Busy Central Bank Week Ahead:
Reserve Bank of Australia. May 2nd and June 6th, the RBA surprised consensus with 25bps hikes. Consensus once again expected no change to the cash rate of 4.1% this Tuesday but with markets pricing a return to hiking later.
Bank Negara Malaysia. Although Bank Negara surprisingly raised its overnight policy rate by 25 bps at its last meeting, consensus expects the bank may hold this Thursday and mark the end of its tightening cycle. There’s a small chance that the bank might conduct one final hike of 25 bps to end the cycle.
This Week’s Interest Rate Announcements (Time E.T.)
Tuesday, July 4, 2023
- 00:30 RBA interest rate decision
Thursday, July 6, 2023
- 03:00 Bank Negara Malaysia rate decision
- 08:00 Poland rate decision
This Week’s Central Bank Speeches, Meetings (Time E.T.)
Monday, July 3, 2023
- 08:00 ECB’s Nagel to speak in Frankfurt
Tuesday, July 4, 2023
- 00:30 RBA interest rate decision
- 21:30 RBA Chart Pack Release
Wednesday, July 5, 2023
- 03:00 Bundesbank symposium German Buba President Nagel Speaks
- 03:00 European Central Bank Non-monetary Policy Meeting
- 03:30 German Buba Vice President Buch Speaks
- ECB’s Villeroy speaks at the Paris Europlace forum
- 14:00 FOMC issues minutes on June policy meeting
- 16:00 Fed‘s Williams is part of “fireside chat” at the annual meeting of the Central Bank Research Association (CEBRA) at the New York Fed
Thursday, July 6, 2023
- 03:00 Bank Negara Malaysia rate decision
- 08:00 Poland rate decision
- 08:45 German Buba Mauderer Speaks
- 12:00 German Buba President Nagel Speaks
- 16:30 Fed’s Balance Sheet
- Bloomberg Conference on “Foreign Direct Investment: Scaling New Heights” in London
- Bank of Russia Governor Nabiullina takes part in the bank’s financial congress in St. Petersburg
- Fed’s Logan speaks on a panel about the policy challenges for central banks at CEBRA meeting
Friday, July 7, 2023
- 03:30 BoE Gov Bailey Speaks
- 05:00 ECB’s de Guindos speaks at a workshop on “Examining the inflationary surge affecting economies around the world,” organized by King’s College in London
- 08:00 German Buba President Nagel Speaks
- 12:45 ECB’s Christine addresses the REAIX 2023 “Renewing Hope” event in Aix-en-Provence, France
- BOE’s Mann on a panel at the CEBRA meeting in New York
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.
Latest Key Central Bank Decisions, Reports Archive
2023
- Sweden’s Riksbank Raise Rates by 25 bps, Krona Falls to New Record Low Against Euro
- Banco de México Leaves Rates Unchanged at Record High 11.25%, Inflation Risks to Upside
- Central Bank of Turkey Raises Rates First Time in Two Years, By 650 bps to 15.0%, Lira Collapses
- Bank of England Raises Interest Rates to 15-year High 5.00%, Risk of British Recession Increases
- Norway’s Norges Bank Raised Rates by 50 bps to 3.75%, Supports Krone, Fights Inflation
- Philippines Central Bank Held Rates at 6.25%, Highest Since May 2007 as Inflation ModeratesTRADERS COMMUNITY
- Bank Indonesia Keeps Rates Unchanged at Highest Level Since 2009 With Weaker Rupiah
- Swiss National Bank Raised Policy Rate by 25 bps to 1.75%, Will Remain Active in FX Market
- Brazil Central Bank Left Rates Steady at 13.75%, Delete Reference to Possibly Resuming Hiking
- Bank of Japan Keeps Monetary Policy Steady, No Change to JGB Yield Band as Expected
- ECB Tightens Screws, Raises Rates Another 25bps Despite Europe Being in a Recession
- Hong Kong’s Monetary Authority Kept Interest Rates in Lockstep With Fed, Hibor Continues to Rise
- Federal Reserve Leave Rates Unchanged as Expected. See 5.6% Fed Fund Rate at Year End
- Reserve Bank of India Kept its Key Repo Rate at 6.50% as Expected
- Bank of Canada Raises Rates After Five Month Pause by 25bps to 4.75%
- RBA Suprises Again Raising Rates to Ten Year High 4.10%, Australian Dollar Higher
- South Africa Raises Interest Rates 50bps, Rand Falls to All Time Low
- Ahead of Election Runoff Turkey Central Bank Leaves Rates at 8.5% as Lira Hits New Lows
- Reserve Bank of New Zealand Raise Rates by 25bp to 5.50%, Kiwi Sells Off on Peak Rate
- Bank of England Raises Interest Rates 25bps to 4.50%, Inflation Remains Too High
- Federal Reserve Financial Stability Report, Follows Three of the Four Largest Failures in U.S. History
- ECB Raises Rates Another 25bps, Highest Level Since July 2008
- Norway Hikes Interest Rate to 3.25 percent, Concerns About Weak Krone
- Hong Kong’s Monetary Authority Raised Interest Rates 25bps Despite Banking Liquidity at 2008 Lows
- Brazil Central Bank Left Rates Steady for Sixth Month at 13.75%, Less Likely to Resume Hikes
- Federal Reserve Raises Rates 25bps as Expected, Removes Additional Firming May be Appropriate
- Bank Negara Malaysia Surprises by Raising Interest Rates 25 bps to 3%
- Deja Vu as Dollar Yen Soars After Bank of Japan Keeps Monetary Policy Steady, No Change to JGB Yield Band
- Sweden’s Riksbank Raise Rates by 50 bps, However Dovish Tilt Weakens Krona
- An RBA Fit for The Future, 51 Revolutionary Recommendations for Australia’s Central Bank
- Bank Indonesia Keeps Rates Unchanged at Highest Level Since 2009 With Rupiah Stable
- Bank of Canada Holds Rates at 4.50% as Expected, Sees Inflation at 2% End of 2024
- Bank of Korea Keeps Rates Unchanged at 3.50%, Higher Rate Remains Possible
- Reserve Bank of India Surprised Keeping its Key Repo Rate at 6.50%
- Reserve Bank of New Zealand Unexpectantly Raise Rates by 50bp to 5.25% to Highest Since December 2008
- RBA Keeps Rates Steady at Ten Year High 3.6%, Monetary Policy Operates with a Lag
- ECB Raises Rates Another 50bps, Banking Sector Resilient
- Federal Reserve Beige Book Highlights Supply Chain Disruptions Continued to Ease
- Bank of Canada Holds Rates at 4.50% as Expected, USDCAD at Four Month High
- RBA Raises Rates to Ten Year High 3.6%, Less Hawkish Statement
- 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 Further 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
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Sources: TC WSJ Bloomberg Scotia Bank
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