It appears that central banks have reached their peak rates. Here’s how markets think it will fall

It appears that central banks have reached their peak rates.  Here’s how markets think it will fall

  • The US Federal Reserve, the European Central Bank and the Bank of England have raised interest rates significantly over the past 18 months in an attempt to curb runaway inflation.
  • All three kept interest rates steady at their recent meetings, and market prices point to varying amounts of cuts by the end of 2024 despite policymakers’ cautious tones.
A trader works as the screen shows Federal Reserve Chairman Jerome Powell’s news conference after the federal funds rate announcement, on the floor of the New York Stock Exchange (NYSE) in New York City, July 26, 2023.

Brendan McDiarmid | Reuters

The world’s major central banks have paused their interest rate hike cycles in recent weeks, and with data suggesting economies are declining, markets are turning their attention to the first round of cuts.

The US Federal Reserve, the European Central Bank and the Bank of England have raised interest rates significantly over the past 18 months in an attempt to curb runaway inflation.

The Federal Reserve on Wednesday kept benchmark interest rates steady at a target range of 5.25% to 5.5% for the second straight meeting after ending a string of 11 hikes in September.

Although Chairman Jerome Powell was keen to stress that the Fed’s work on inflation is far from over, the annual rise in the CPI reached 3.7% in September, down from the pandemic-era peak of 9.1% in June 2022.

However, despite Powell’s refusal to close the door on further rises in order to finish the job on inflation, markets interpreted the central bank’s tone as a slightly dovish pivot and rose on the back of the decision.

The market is now pricing in the Fed’s first 25 basis point cut on May 1, 2024, according to CME Group’s FedWatch tool, with 100 basis point cuts now expected by the end of next year.

Since last week’s decision, US nonfarm payrolls data has been weaker than expected for October, with job creation below trend, unemployment rising slightly and wages slowing further. Although the headline inflation rate remained unchanged at 3.7% annually in the period from August to September, the core figure fell to 4.1%, after falling by almost half over the past 12 months.

“Core personal consumption expenditures, the Fed’s preferred measure of inflation, are lower than that at 2.5% (three-month, annualized),” analysts at DBRS Morningstar noted.

“The delayed effects of a cooler housing market should reinforce the deflationary trend over the next few months.”

But despite the cautious data points, short-term U.S. Treasuries reversed course to a sell-off on Monday, which Deutsche Bank’s Jim Reed attributed to investors starting “to question whether last week’s narrative about interest rate cuts was overblown.” The US economy is also stronger.” More flexible than the UK and the Eurozone.

“For example, the Fed’s market pricing now indicates a 16% chance of raising interest rates again, up from 11% on Friday,” Reid said in an email on Tuesday.

“Furthermore, the rate quoted at the December 2024 meeting rose +12.4 basis points to 4.47%. So there was a clear, if partial, reversal of last week’s moves.”

Reed also stressed that this is the seventh time this cycle that markets have reacted significantly with cautious speculation.

“It is clear that interest rates will not keep rising forever, but on the previous six occasions we have seen hopes for near-term rate cuts dashed each time. Note that we still have inflation above target in every G7 country.” He added.

European Central Bank

The European Central Bank late last month ended a series of 10 consecutive increases to keep its benchmark interest rate at a record 4%, with euro zone inflation falling to a two-year low of 2.9% in October and the core figure continuing to fall. .

The market is also anticipating roughly 100 basis points of cuts for the ECB by December 2024, but the first 25 basis points cut is mostly priced in for April, as economic weakness across the 20-member common currency bloc fuels bets that the central bank will… The first to begin dismantling his hard-line political stance.

Gilles Mueck, chief economist at AXA Group, said October’s inflation rate confirmed and amplified the message that “falling inflation has seriously arrived in Europe”, justifying the ECB’s “new wisdom”.

“Of course, the current low inflation does not preclude the possibility of finding a resistance line well above the ECB’s target. However, the confirmation that the eurozone was heading towards recession last summer reduces this possibility,” Mueck said. Research note on Monday.

After the October meeting, ECB President Christine Lagarde rejected the proposal to cut interest rates, but National Bank of Greece Governor Yannis Stournaras has since publicly discussed the possibility of a cut in mid-2024 provided inflation stabilizes below 3%.

“This implicitly calls for a forward-looking version of monetary policy that takes delay into account to calibrate its stance. Clearly, waiting for inflation to reach 2% before cutting interest rates would be overkill,” Mueck said.

“There is no doubt in our minds that the current data flow clearly favors the doves, but the hawks are far from giving up the fight.”

Bank of England

The Bank of England on Thursday left its key interest rate unchanged at 5.25% for the second meeting in a row after ending a string of 14 consecutive hikes in September.

However, minutes from last week’s meeting confirmed the MPC’s expectations that interest rates will need to stay high for longer, with the UK CPI holding steady at 6.7% in September. Despite this, the market on Monday was pricing in around 60 basis points of cuts by December 2024, albeit starting in the second half of the year.

Economists at BNP Paribas on Thursday noted an “eye-catching” addition to guidance from the Monetary Policy Committee, which said its latest forecasts indicate that “monetary policy is likely to need to be restrictive for an extended period of time.”

“Governor Andrew Bailey’s comments at the press conference indicated that this guidance was not intended to reverse the market-implied interest rate path that underpins his latest forecast, with the 25 basis point cut not being fully priced in until the second half of 2024,” they said.

“Instead, the intent was to signal that cuts are unlikely to emerge as part of the conversation anytime soon.”

At Thursday’s press conference, Bailey emphasized the upside risks to the bank’s inflation outlook, rather than considering any suggestion of cuts on the horizon.

“While we do not think this is necessarily an indication of a significant risk of further rate hikes in the near term, we read it as another sign that the MPC is not considering cutting rates and will not do so for a while.” He added.

    (Tags for translation) US Economy 

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