Central Bank Watch – Week Ahead Focus Fed, BOE, Riksbank Amid Irrational Exuberance

The coming week brings out meetings with the Federal Reserve mulling over rate guidance and QT parameters. Nothing is expected from that statement-only outcome and markets have reduced punts for rate cuts at the March 20th and May 1st meetings. We also have the Bank of England, Riksbank, Hungary and several LatAm central banks, Brazil, Chile and Columbia. They are confronted by a new round of developments such as the shipping crisis in the Middle East that injects further uncertainty into their plans. At the same time there is the old irrational exuberance factor at play.

Financial conditions have loosened dramatically, in turn highly speculative financial markets have performed spectacularly, while key inflation measures confirm an easing of pricing pressures. The S&P 500, Germany’s DAX, and France’s CAC40 are at record highs Toronto’s TSX i and the UK’s FTSE100 are not far behind.

Last week we had no surprises from the decisions by Bank of Japan, Bank of Canada, Bank Negara Malaysia, Norges Bank, South African Reserve Bank, Central Bank of Turkey and the European Central Bank. The Fed’s preferred PCE measure of inflation on January 26th also offered little excitement.

The Treasury market continues to respond to hot geopolitical risk, inflation, greater supply and credit risk. Curve shapes are being bent as the US economy continues to grow much faster than the non-inflationary speed limit and is outpacing many other major industrialized economies.

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.

Spurred by slowing inflation and signs of a cooling growth, traders and investors have recently rushed headlong into US government debt, convinced that the Federal Reserve is done raising interest rates and will shift to cutting them by the middle of next year. That ended a six-month losing streak for Treasuries and pushed the market to a gain of 2.6% in November. It’s the biggest advance since March, when there were fears that a banking crisis would sink the economy.

In the Week Ahead

In the week ahead we have:

  • FOMC The Federal Reserve’s latest policy stance will be unveiled on Wednesday when the FOMC statement arrives at 2pmET followed by Chair Powell’s press conference at 2:30pmET. They updated the Summary of Economic Projections including the ‘dot plot’ at the December meeting (recap here) and the next forecast update will come in March. Forward guidance and any discussion on QT changes will be the things to watch. Statement changes are likely to be minimal. The opening sentence probably needs adjusting. It’s technically correct to say growth “slowed from its strong pace in the third quarter” but the upside surprise at 3½% (4.9% prior) is still very strong. Perhaps they’ll simply reference ongoing strength in the US economy.
  • Robust data had curiously little impact on rate cut expectations. The market is still at about 50% likelihood of a cut at the March 20th meeting and is pricing 33 bps of cuts by the May 1st meeting. Encouraging inflation reports have countered strong economic data. Q4 Core PCE was reported at 2.0%, matching Q3’s level. For perspective, Core PCE was at 4.7% during Q4 ’22 and 5.2% for Q4 ’21. A key Fed inflation gauge, December’s monthly PCE, was reported at 0.2% (2.6% y-o-y), with Core PCE at 0.2% (2.9% y-o-y).
  • BANK OF ENGLAND The Bank of England weighs in on Thursday and while no policy changes are expected, the guidance it provides could be key. Markets are fully pricing the first rate cut to occur by the June 20th meeting and with about half of a cut priced for the May 9th meeting. Watch the break down of votes on the MPC for an indication of whether the holdouts are giving up on the possible need for additional tightening; most expect a weakened minority in favour of hiking.
  • RIKSBANK Sweden’s central bank is widely expected to hold its repo rate unchanged at 4% again on Thursday. Expect a generally hawkish tone in the wake of comments from central bank officials. Governor Erik Thedeem recently said “The risk picture is relatively similar to when we last met. We have said that the exchange rate is a concern for inflation and there is no reason to change that view.” First Deputy Governor Anna Breman added that “The upside risks are somewhat larger, because of uncertainties around the global situation, corporate pricing behaviour and, to some extent, the development of the krona.”
  • BCB Another 50bps Selic rate cut is universally expected on Tuesday. Banco Central do Brasil explicitly guides its intentions one meeting ahead at a time as it has cut in 50bps moves for the past four meetings. This one would bring cumulative cuts to 250bps from the 13.75% policy rate peak that existed until last summer. The last statement on December 13th said that “Committee members unanimously anticipate further reductions of the same magnitude in the next meetings” and note the plural reference in terms of expectations for the next meeting on March 20th. That takes some of the fun out of it for forecasters.
  • BCCH This one could be a doozie. Banco Central de Chile has cut its policy rate by 300bps so far and started with a 100bps cut last summer, after which it has delivered a mixture of 25s and 50s before cutting by 75bps in December. Tuesday’s meeting is thought to bring back the risk of another 75bps cut or possibly 100bps. December’s CPI print of 3.9% y/y was lower than expected and brings the rate closer to the central bank’s 3% target over two years. That could merit an expedited path back toward a more neutral setting.
  • BANREP Banco de la República Colombia After commencing an easing cycle with a 25bps cut in December, Colombia’s central bank faces an evenly consensus that is divided between another 25bps reduction and a larger 50bps cut on Tuesday. Sergio Olarte in the 50bps camp. He acknowledges recent evidence that the economy has been contracting, but also flags a 12% minimum wage hike that is smaller than the 16% hike last year. Olarte thinks quicker easing may be in the cards through 2024H1.

Central Bank Highlights This Past Week:

This week’s central bank main events included:

  • Bank of Japan The Bank of Japan at its January monetary policy meeting maintained existing policy as widely expected. The BoJ kept unchanged its -0.1% target for short-term interest rates, and 0% for the 10-year government bond yield unanimously.
  • Bank of Canada’s full suite of communications came on Wednesday. Bank of Canada held its overnight rate to 5.00% in January 2023 as largely expected by markets, following up the no change from the previous meetings. The market was pricing in a 15% chance of a rate cut.
  • ECB ECB kept key rates unchanged in its January monetary policy decision at 4.50%, multi-year highs for the third consecutive meeting, with the closely watched deposit facility rate 4.00%, in line with markets thoughts. The ECB broke their record streak of rate hikes with the pause and markets are also convinced that they aren’t going to add any more considering the state of the economy at the moment.
  • NORGES BANK Norway’s central bank, the Norges Bank’s Monetary Policy and Financial Stability Committee kept rates at 4.50% at its January Meeting. The bank has borrowing costs that are the highest level since December 2008 as it sought to combat persistent inflation. Norges Bank guided it would stay on hold for “some time.”
  • BANK NEGARA—Malaysia’s central bank is widely expected to remain on hold at 3% again on Wednesday. Another inflation update at the start of the week is likely to continue to show CPI running at about a 1 ½% y/y clip with core inflation at about 2%. Low inflation is one thing. Risking currency instability is another and that is likely to be the dominant consideration. The ringgit has been mildly depreciating since the beginning of the year relative to the USD as market pricing for Fed rate hikes has been pushed out. Like many other central banks, the ability to cut the policy rate may rise as Fed rate cuts draw nearer but for now the easing is occurring through the local currency.
  • SARB The South African Reserve Bank (SARB) kept its benchmark repo interest rate at 8.25% at its January 25th, 2024, meting as widely anticipated. Rates remain at their highest since 2009. The bank highlighted the persistence of inflation risks while emphasizing a balanced evaluation of risks to medium-term growth.
  • CENTRAL BANK OF TURKEY The Central Bank of Turkey hiked by another 250bps from 42.5 percent to 45 percent as expected. It also signaled the end of rate hikes by stating “that the monetary tightness required to establish the disinflation course is achieved and that this level will be maintained as long as needed.”

Previews come from Scotiabank and other sources.

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.

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.

Eyes on the Bond Market

US Bond Watch

U.S. Treasuries closed out the week lower in response to stronger than expected personal spending (actual 0.7%; consensus 0.4%) in December and Pending Home Sales for December (actual 8.3%; consensus 2.3%) giving rise to Fed officials hawkish rhetoric ahead. The selling drove the 10-yr yield back above its 50-day moving average (4.129%) while yields on 2s and 5s reversed the bulk of their declines from Thursday. This week’s action alleviated some of the pressure on the 2s10s spread, expanding it by six basis points to -20 bps while the 2s30s spread is no longer inverted, ending the week at 3 bps, up from -6 bps a week ago.

Yield Watch

Friday/Week

  • 2-yr: +4 bps to 4.36% (-5 bps for the week)
  • 3-yr: +5 bps to 4.17% (-1 bp for the week)
  • 5-yr: +4 bps to 4.06% (-1 bp for the week)
  • 10-yr: +3 bps to 4.16% (+1 bp for the week)
  • 30-yr: +1 bp to 4.39% (+4 bps for the week

Highlights – Federal Reserve

  • Federal Reserve Credit declined $10.4bn last week to $7.639 TN.
  • Fed Credit was down $1.250 TN from the June 22nd, 2022, peak.
  • Over the past 228 weeks, Fed Credit expanded $3.913 TN, or 105%.
  • Fed Credit inflated $4.839 TN, or 172%, over the past 585 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt sank $22.0bn last week to a nine-month low $3.357 TN.
  • “Custody holdings” were up $36.3bn, or 1.1%, y-o-y.

Fed 2023 Bank Stress Tests.

Busy Central Bank Week Ahead:


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

Sunday, January 28, 2024

  • None Seen

Monday, January 29, 2024

  • None Seen

Tuesday, January 30, 2024

  • 08:00 Magyar Nemzeti Bank (MNB) Interest Rate Decision

Wednesday, January 31, 2024

  • 13:00 Banco de la República Colombia Interest Rate Decision
  • 14:00 FOMC Fed Interest Rate Decision
  • 16:00 Banco Central de Chile Interest Rate Decision
  • 16:00 Banco Central do Brasil Interest Rate Decision

Thursday, February 1, 2024

  • 03:30 Riksbank Interest Rate Decision
  • 07:00 BoE Interest Rate Decision

Friday, February 2, 2024

  • None Seen

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

Monday, January 29, 2024

  • 08:10 ECB’s De Guindos Speaks

Tuesday, January 30, 2024

  • 04:00 ECB’s Lane Speaks
  • 06:45 ECB Supervisory Board Member Tuominen Speaks
  • 08:00 Magyar Nemzeti Bank (MNB) Interest Rate Decision
  • 18:50 BoJ Summary of Opinions

Wednesday, January 31, 2024

  • 04:00 ECB Bank Lending Survey
  • 13:00 Banco de la República Colombia Interest Rate Decision
  • 14:00 FOMC Fed Interest Rate Decision
  • 14:30 FOMC Press Conference
  • 16:00 Banco Central de Chile Interest Rate Decision
  • 16:00 Banco Central do Brasil Interest Rate Decision

Thursday, February 1, 2024

  • 03:30 Riksbank Interest Rate Decision
  • 06:30 ECB’s Lane Speaks
  • 07:00 BoE Interest Rate Decision
  • 07:00 BoE MPC Meeting Minutes
  • 08:45 ECB President Lagarde Speaks
  • 09:15 BoE Gov Bailey Speaks
  • 16:30 Fed’s Balance Sheet
  • 16:30 Reserve Balances with Federal Reserve Banks

Friday, February 2, 2024

  • 07:15 BoE MPC Member Pill Speaks

Federal Reserve FOMC Schedule 2024

The Federal Open Market Committee on Friday announced its tentative meeting schedule for 2024:

  • January 30-31 (Tuesday-Wednesday)
  • March 19-20 (Tuesday-Wednesday)
  • April 30-May 1 (Tuesday-Wednesday)
  • June 11-12 (Tuesday-Wednesday)
  • July 30-31 (Tuesday-Wednesday)
  • September 17-18 (Tuesday-Wednesday)
  • November 6-7 (Wednesday-Thursday)
  • December 17-18 (Tuesday-Wednesday)
  • January 28-29, 2025 (Tuesday-Wednesday)

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.


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Sources: TC WSJ Bloomberg Scotia Bank

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