Focus on Powell, Fed Loan Survey and RBA Interest Rate

The week was surprised by a more hawkish Federal Reserve chair this week over rate guidance and QT parameters though it barely reduced punts for rate cuts at future meetings. We get more from the Fed this week with a Powell 60 minutes interview and the Fed’s loan survey to inform on credit tightening. Also ahead is ECB inflation expectations and monetary policy decisions from Banxico, Peru, RBA, Poland. India and Thailand. There were no surprises last week from the Bank of England, Riksbank, Hungary and the several LatAm central banks, Brazil, Chile and Columbia.

Central banks 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:

  • Federal Reserve— Chair Powell’s CBS interview on Sunday evening at 7pmET is probably best treated as a stale assessment because it was pre-recorded before incredibly strong figures on job creation and wage pressures. The Federal Reserve will also update its Senior Loan Officer Survey on Monday. Like the Canadian measure, this will help to further inform the incremental tightening of lending conditions (chart 16) that must also be taken in the same context as easing financial market conditions relative to prior months.
  • RBA—The cash rate target is expected to remain unchanged at 4.35% on Tuesday. The RBA is expected to caution against premature easing in relation to markets that are pricing part of a quarter point rate cut by the May 7th meeting. Expect the RBA to flag modest progress on underlying inflation but to still indicate that readings over 4% y/y for weighted median and trimmed mean CPI remain too hot in relation to the 2–3% headline inflation target. They are also likely to want to see what happens to wage growth when Q4 figures land on February 20th in the context of the sharply accelerating trend (chart 17).
  • BoT— The Bank of Thailand is widely expected to remain on hold at a benchmark policy rate of 2.5% on Wednesday. The central bank views its stance as relatively neutral and expects inflation to rise going forward from the current weakness.
  • Banxico— No change is expected to the overnight rate set by Mexico’s central bank on Thursday. It is widely expected to remain at 11.25%. Minutes to the December meeting, however, indicated that it may be open to a cut toward the end of Q1 or Q2. That may be stale now after Fed Chair Powell explicitly ruled out a cut in March and sounded in no rush to ease. Ongoing upside risks in Mexican inflation, procyclical fiscal policy economic activity that has gained momentum and persistent core inflation pressures combine to add reasons to remain on hold.
  • BCRP— Peru’s central bank is widely expected to cut its reference rate by another 25bps to 6.25% on Thursday. That would result in a cumulative 150bps of easing since cuts began in September. President Velarde has remarked that “Inflation is close to the target range, and we expect it to be within that target in the next two months.” While 1-year ahead inflation expectations seem to be well anchored at 2.8%.
  • RBI— The Reserve Bank of India (Thursday) is widely expected to leave its repurchase rate at 6.5%. After warning about inflation in December, the RBI may sound relatively more neutral. Core inflation has continued to decelerate to under 4% y/y which remains above the headline target range of 1–3% but is headed in the right direction. The Indian government’s interim budget sought to rein in the fiscal deficit.

Central Bank Highlights This Past Week:

This week’s central bank main events included:

  • FOMC The Fed left rates as is as expected. Federal Reserve’s Powell said a March cut is “not the most likely case.” Powell wisely rejects a rules-based approach. A QT discussion was held and a fuller discussion was promised for March, which probably sets up a likely announcement to reduce Quantitative Tightening. All nearer-term FOMC meeting dates trimmed cut pricing
  • BANK OF ENGLAND The Bank of England statement reference to further potential tightening was removed, two MPC members continued to vote for another hike with one voting to cut. Key, however, is that they retained reference to remaining restrictive for sufficiently long and for an extended period while they ‘keep under review’ how long to keep Bank Rate unchanged at 5.25%.
  • RIKSBANK Sweden’s central bank kept its policy rate unchanged at 4% as universally expected. The statement said “There is less risk of inflation becoming entrenched at levels that are too high,” and that “The policy rate can therefore probably be cut soon than was indicated in the November forecast” which pointed to easing over 2025H2. It also said “If the prospects for inflation remain favorable, the possibility of the policy rate being cut during the first half of the year cannot be ruled out.” They did not publish updated forecasts that would fill in this window and the next forecasts with explicit forward rate guidance will be published on March 27th.
  • 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 Banco Central de Chile cuts 100bps, as expected; anticipating a cut of at least 100bps at the next meeting absent inflationary surprises. One member voting for a larger reduction. Chilean manufacturing production surprisingly contracting year-on-year but retail sales posting a smaller-than-expected decline; commercial activity also contracted 3% y/y.
  • BANREP Banco de la República Colombia cut the monetary policy rate by 25bps to 12.75% in a split vote, with five members voting for the 25bps cut and two voting for a 50bps cut. It was a surprise for market consensus and us, as the median expectation was for a 50bps cut. In the communiqué, the central bank was cautious in recognizing the inflation progress as they said again that the core services prices didn’t reflect the same progress observed in the headline inflation. In addition, they still see risk around inflation, with the minimum wage having been set above the central bank’s expectation. There is still uncertainty around the effect of the “El Niño” weather phenomenon and regulated prices. The split vote is now tilted to the hawkish side, suggesting that there are 3 “swing” board members between the previous and current meetings.

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 on a sharply lower note, yields coming their lowest levels of the year after the red-hot January jobs report showed headline growth of 353,000, twice as high consensus. The report fed the rationale that the Fed will maintain its hawkish rhetoric. Notably Chicago Fed President Goolsbee said that the report will not influence policy in the near term, noting that the drop in the average workweek to 34.1 hours from 34.3 hours reflected weakness below the strong surface.

Another volatile week for the notably unstable benchmark MBS yields. They were down as much as 33 bps at Thursday’s low, only for yields to reverse 26 bps higher in Friday trading to end the week a basis point lower at 5.50%.

Yield Watch

Friday/Week

  • 2-yr: +19 bps to 4.38% (-2 bps for the week)
  • 3-yr: +17 bps to 4.14% (-3 bps for the week)
  • 5-yr: +19 bps to 3.99% (-7 bps for the week)
  • 10-yr: +17 bps to 4.03% (-13 bps for the week)
  • 30-yr: +12 bps to 4.23% (-16 bps for the week)

Highlights – Federal Reserve

  • Federal Reserve Credit declined $20.2bn last week to $7.619 TN.
  • Fed Credit was down $1.271 TN from the June 22nd, 2022, peak.
  • Over the past 229 weeks, Fed Credit expanded $3.892 TN, or 104%.
  • Fed Credit inflated $4.808 TN, or 171%, over the past 586 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt dropped another $12.7bn last week to a nine-month low $3.344 TN.
  • “Custody holdings” were up $19.4bn, or 0.6%, y-o-y.

Powell at the February FOMC:

Powell: “Our strong actions have moved our policy rate well into restrictive territory, and we have been seeing the effects on economic activity and inflation… We believe that our policy rate is likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”

Chair Powell: “I’m not so worried about that. Again, we’ve had inflation come down without a slow economy and without important increases in unemployment, and there’s no reason why we should want to get in the way of that process if it’s going to continue. So, I think declining inflation – continued declines in inflation – are really the main thing we’re looking at. Of course, we want the labor market to remain strong, too. We don’t have a growth mandate. We’ve got a maximum employment mandate and a price stability mandate, and those are the two things we look at. Growth only matters to the extent it influences our achievement of those two mandates.”

Powell: “So, I guess I would just say this: executive summary would be that growth is solid to strong over the course of last year. The labor market, 3.7% unemployment indicates that the labor market is strong. We’ve had just about two years now of unemployment under 4%. That hasn’t happened in 50 years. So, it’s a good labor market. And we’ve seen inflation come down… The outlook, we do expect growth to moderate. Of course, we have expected it for some time, and it hasn’t happened. But we do expect that it will moderate as supply chain and labor market normalization runs its course.”

Powell: “In terms of growth, we’ve had strong growth. If you take a step back, we’ve had strong growth, very strong growth last year, going right into the fourth quarter. And yet, we’ve had a very strong labor market, and we’ve had inflation coming down. So, I think, whereas a year ago, we were thinking that we needed to see some softening in economic activity, that hasn’t been the case. So, I think we look at stronger growth, we don’t look at it as a problem. I think, at this point, we want to see strong growth. We want to see a strong labor market. We’re not looking for a weaker labor market. We’re looking for inflation to continue to come down, as it has been coming down for the last six months.”

Fed 2023 Bank Stress Tests.

Busy Central Bank Week Ahead:


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

Sunday, February 4, 2024

  • None Seen

Monday, February 5, 2024

  • 22:30 RBA Interest Rate Decision

Tuesday, February 6, 2024

  • None Seen

Wednesday, February 7, 2024

  • 03:30 Iceland Interest Rate Decision
  • 08:00 Poland Interest Rate Decision
  • 23:30 RBI Interest Rate Decision

Thursday, February 18, 2024

  • 14:00 Mexico Interest Rate Decision
  • 18:00 BCRP Peru’s central bank Interest Rate Decision

Friday, February 9, 2024

  • None Seen

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

Sunday, February 4, 2024

  • 19:00 USD Fed Chair Powell Speaks

Monday, February 5, 2024

  • 12:30 BoE MPC Member Pill Speaks
  • 14:00 FOMC Member Bostic Speaks
  • 14:00 Federal Reserve Loan Officer Survey
  • 22:30 RBA Interest Rate Decision

Tuesday, February 6, 2024

  • 06:00 Brazil BCB Copom Meeting Minutes
  • 12:00 FOMC Member Mester Speaks
  • 13:00 BoC Gov Macklem Speaks
  • 19:30 RBA Chart Pack Release

Wednesday, February 7, 2024

  • 03:30 Iceland Interest Rate Decision
  • 03:40 BoE Breeden Speaks
  • 05:00 German Buba Balz Speaks
  • 07:15 BoE Deputy Governor Woods Speaks
  • 08:00 Poland Interest Rate Decision
  • 12:30 FOMC Member Barkin Speaks
  • 13:30 BOC Summary of Deliberations
  • 14:00 FOMC Member Bowman Speaks
  • 23:30 RBI Interest Rate Decision

Thursday, February 8, 2024

  • 09:15 ECB’s Elderson Speaks
  • 10:00 BoE MPC Member Mann
  • 10:30 ECB’s Lane Speaks
  • 12:05 FOMC Member Barkin Speaks
  • 13:00 Atlanta Fed GDPNow (Q1)
  • 14:00 Mexico Interest Rate Decision
  • 16:30 Fed’s Balance Sheet
  • 16:30 Reserve Balances with Federal Reserve Banks
  • 17:30 RBA Gov Bullock Speaks
  • 18:00 BCRP Peru’s central bank Interest Rate Decision

Friday, February 9, 2024

  • None Seen

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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