Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 07/11/23
Central banks have probably hit peak interest rates
Key Takeaways
The Federal Reserve maintained for a 2nd consecutive meeting the target range of the Federal Funds Rate (FFR) at 5.25% - 5.50%, as expected. Recall that the median “dot plot” back in September 2023 suggested one more hike by year-end. However, in the press conference, Chair Powell did not appear to robustly defend a rate increase in the last remaining meeting of 2023.
According to Mr. Powell, significant progress has been made in the effort to bring down inflation. While the Fed statement still refers to “additional policy firming”, risks regarding the future short-term path of interest rates (higher or stable) are becoming more balanced. All in, swap markets are pricing a c. 90% probability that the Fed will leave rates unchanged at its December 13th meeting.
The latest labor market trends, if sustained, would advocate in favor of the Fed standing pat. US headline job creation came out below expectations, wage inflation decelerated further, and the unemployment rate ticked up to (a still low) 3.9%, up by 0.5 pps in the past six months.
The Bank of England also maintained for a 2nd consecutive meeting the Bank Rate at 5.25%, as expected. Futures pricing suggests that investors anticipate the hiking cycle to have ended, with BoE Governor Bailey though pushing back against expectations for cuts any time soon.
The lower likelihood for an aggressive Fed, pushed equities and bonds simultaneously higher. The S&P500 recorded its strongest weekly gain in a year (+5.9% wow | +14% ytd). The gains were broad-based, with the S&P500 equally-weighted index rising also by +5.9% (0% ytd). On the other side of the Atlantic, European equities increased by +3.4% (+5% ytd).
Government bonds rallied in the past week, due to (i) increased expectations that the hiking cycle from major central banks has concluded; (ii) slightly less-than-expected US Treasury borrowing needs for Q4 and (iii) less-aggressive-than-expected Yield Curve Control (YCC) adjustments by the Bank of Japan.
The yield on the US 10-year sovereign bond decreased by 30 bps wow to 4.52% and the 10-year Bund yield declined by -18 bps wow to 2.65%, while euro area periphery bond spreads narrowed. Nevertheless, volatility in bond markets continues in the current week.
Investors keep an eye on the US federal budget saga. If further government funding is not passed from the legislature by November 17th, a partial federal government shutdown is likely. The return to a sustainable fiscal path remains an important challenge for US policymakers, particularly with Presidential Elections looming in November 2024.
The federal budget deficit stood at -6.3% of GDP in FY:2023 versus a 40-year average of -3.9%. The actual deficit in FY:2023 was larger than the Congressional Budget Office’s estimates back in June 2023 (-5.8% of GDP). According to CBO forecasts, the deficit is expected to average -5.4% from FY:2024 to FY:2028, with the federal debt held rising to 105% from 98% in FY:2023. At the general government level, the IMF projects an average deficit of -7.1% of GDP from calendar year 2024 to 2028 (from -8.2% in 2023), with the debt at 138% of GDP from 123% in 2023.
Key Takeaways
The Federal Reserve maintained for a 2nd consecutive meeting the target range of the Federal Funds Rate (FFR) at 5.25% - 5.50%, as expected. Recall that the median “dot plot” back in September 2023 suggested one more hike by year-end. However, in the press conference, Chair Powell did not appear to robustly defend a rate increase in the last remaining meeting of 2023.
According to Mr. Powell, significant progress has been made in the effort to bring down inflation. While the Fed statement still refers to “additional policy firming”, risks regarding the future short-term path of interest rates (higher or stable) are becoming more balanced. All in, swap markets are pricing a c. 90% probability that the Fed will leave rates unchanged at its December 13th meeting.
The latest labor market trends, if sustained, would advocate in favor of the Fed standing pat. US headline job creation came out below expectations, wage inflation decelerated further, and the unemployment rate ticked up to (a still low) 3.9%, up by 0.5 pps in the past six months.
The Bank of England also maintained for a 2nd consecutive meeting the Bank Rate at 5.25%, as expected. Futures pricing suggests that investors anticipate the hiking cycle to have ended, with BoE Governor Bailey though pushing back against expectations for cuts any time soon.
The lower likelihood for an aggressive Fed, pushed equities and bonds simultaneously higher. The S&P500 recorded its strongest weekly gain in a year (+5.9% wow | +14% ytd). The gains were broad-based, with the S&P500 equally-weighted index rising also by +5.9% (0% ytd). On the other side of the Atlantic, European equities increased by +3.4% (+5% ytd).
Government bonds rallied in the past week, due to (i) increased expectations that the hiking cycle from major central banks has concluded; (ii) slightly less-than-expected US Treasury borrowing needs for Q4 and (iii) less-aggressive-than-expected Yield Curve Control (YCC) adjustments by the Bank of Japan.
The yield on the US 10-year sovereign bond decreased by 30 bps wow to 4.52% and the 10-year Bund yield declined by -18 bps wow to 2.65%, while euro area periphery bond spreads narrowed. Nevertheless, volatility in bond markets continues in the current week.
Investors keep an eye on the US federal budget saga. If further government funding is not passed from the legislature by November 17th, a partial federal government shutdown is likely. The return to a sustainable fiscal path remains an important challenge for US policymakers, particularly with Presidential Elections looming in November 2024.
The federal budget deficit stood at -6.3% of GDP in FY:2023 versus a 40-year average of -3.9%. The actual deficit in FY:2023 was larger than the Congressional Budget Office’s estimates back in June 2023 (-5.8% of GDP). According to CBO forecasts, the deficit is expected to average -5.4% from FY:2024 to FY:2028, with the federal debt held rising to 105% from 98% in FY:2023. At the general government level, the IMF projects an average deficit of -7.1% of GDP from calendar year 2024 to 2028 (from -8.2% in 2023), with the debt at 138% of GDP from 123% in 2023.