Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 07/02/23
Federal Reserve: The job is not done
Key Takeaways
The Federal Reserve, on Wednesday, shifted to a slower pace, increasing interest rates by +25 bps to the range of 4.50%-4.75%, from +50 bps in December and +75 bps in November. According to statement’s forward guidance, ongoing increases to interest rates will be appropriate, with December 2022 FOMC forecasts implying two additional hikes, as 25 bps per meeting is now the new standard.
Powell reiterated that interest rate cuts in H2.2023 are not likely, as the Fed will need substantially more evidence to be confident that inflation is on sustained downward path. However, Powell stated that “If we do see inflation coming down much more quickly, that will play into our policy setting”. All told, Powell sounded less hawkish-than-expected, while investors are awaiting his speech at the Economic Club of Washington today, for more hints regarding policy going forward.
The ECB, on Thursday, stayed the course, increasing rates by 50 bps (MRO: 3.0%, DFR: 2.5%), and intents, under any reasonable scenario, to increase rates by another 50 bps in March. Then, it will evaluate the path of monetary policy. The ECB avoided to provide specific guidance post March, but President Lagarde highlighted that March will not constitute the peak for interest rates. According to the ECB, the risks to economic and inflation outlook have become more balanced, from negative and to the upside, previously, mainly due to the recent fall in energy prices.
The ECB also provided implementation details on APP repurchases, with existing proportionalities across each constituent programme (i.e., public sector securities, corporate securities) and jurisdictions to broadly continue, albeit with a stronger tilt towards corporate issuers with a better climate performance.
In December 2022, the ECB announced the reduction of reinvestment volumes by €15 billion, on average, per month, from March 2023 to June 2023 (circa ½ of maturing bonds in the same period), while the pace and path of quantitative tightening after June will be decided over time. Liquidity remains ample (€4.1 trillion, see graph below), despite the reduction of ECB’s balance sheet (56% of euro area GDP) by €942 billion to €7.9 trillion since June 2022, mainly due to early TLTRO repayments.
Global markets took a dovish cue from central banks in the past week, initially extending their strong performance ytd (MSCI ACWI: +7%, Global Aggregate Bond Index: +2%). However, on Friday, unexpectedly strong US labor market data challenged market pricing for the FFR, with the market-implied interest rate path drifting slightly higher by 15 bps and now suggesting a peak FFR of 5.15%, followed by interest rates cuts of circa 50 bps by end-2023. US Treasury yields reversed their drop after the Fed meeting, with spillovers across the board.
Regarding job gains, non-farm payrolls increased by +517k from +260k in December, well above consensus expectations of +185k. The unemployment rate decreased by 0.1 pts to 3.4% in January, its lowest rate since 1969, suggesting that labor market is still very tight and could keep wage growth above levels needed for core inflation to fall to target. For central banks, is too early to declare victory in their fight against inflation.
Key Takeaways
The Federal Reserve, on Wednesday, shifted to a slower pace, increasing interest rates by +25 bps to the range of 4.50%-4.75%, from +50 bps in December and +75 bps in November. According to statement’s forward guidance, ongoing increases to interest rates will be appropriate, with December 2022 FOMC forecasts implying two additional hikes, as 25 bps per meeting is now the new standard.
Powell reiterated that interest rate cuts in H2.2023 are not likely, as the Fed will need substantially more evidence to be confident that inflation is on sustained downward path. However, Powell stated that “If we do see inflation coming down much more quickly, that will play into our policy setting”. All told, Powell sounded less hawkish-than-expected, while investors are awaiting his speech at the Economic Club of Washington today, for more hints regarding policy going forward.
The ECB, on Thursday, stayed the course, increasing rates by 50 bps (MRO: 3.0%, DFR: 2.5%), and intents, under any reasonable scenario, to increase rates by another 50 bps in March. Then, it will evaluate the path of monetary policy. The ECB avoided to provide specific guidance post March, but President Lagarde highlighted that March will not constitute the peak for interest rates. According to the ECB, the risks to economic and inflation outlook have become more balanced, from negative and to the upside, previously, mainly due to the recent fall in energy prices.
The ECB also provided implementation details on APP repurchases, with existing proportionalities across each constituent programme (i.e., public sector securities, corporate securities) and jurisdictions to broadly continue, albeit with a stronger tilt towards corporate issuers with a better climate performance.
In December 2022, the ECB announced the reduction of reinvestment volumes by €15 billion, on average, per month, from March 2023 to June 2023 (circa ½ of maturing bonds in the same period), while the pace and path of quantitative tightening after June will be decided over time. Liquidity remains ample (€4.1 trillion, see graph below), despite the reduction of ECB’s balance sheet (56% of euro area GDP) by €942 billion to €7.9 trillion since June 2022, mainly due to early TLTRO repayments.
Global markets took a dovish cue from central banks in the past week, initially extending their strong performance ytd (MSCI ACWI: +7%, Global Aggregate Bond Index: +2%). However, on Friday, unexpectedly strong US labor market data challenged market pricing for the FFR, with the market-implied interest rate path drifting slightly higher by 15 bps and now suggesting a peak FFR of 5.15%, followed by interest rates cuts of circa 50 bps by end-2023. US Treasury yields reversed their drop after the Fed meeting, with spillovers across the board.
Regarding job gains, non-farm payrolls increased by +517k from +260k in December, well above consensus expectations of +185k. The unemployment rate decreased by 0.1 pts to 3.4% in January, its lowest rate since 1969, suggesting that labor market is still very tight and could keep wage growth above levels needed for core inflation to fall to target. For central banks, is too early to declare victory in their fight against inflation.