Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 13/12/22
The December calendar for central banks' meetings (FED, ECB, BoE, BoJ) is likely to shape investors’ expectations for monetary policy in 2023
Key Takeaways
Global equity markets lost ground in the past week, mainly due to profit-taking ahead of major central bank meetings. The S&P500 fell by -3.4% wow, followed though by an increase of +1.4% on Monday December 12th. Softer-than-expected US CPI data on Tuesday (+7.1% yoy vs +7.5%) supported equities further.
Note that price-to-earnings multiples of 17.1x (12-month forward) remain significant above the long-term average ratio (15.5x), suggesting that equity investors are relative optimistic. On the other hand, the inverted US Treasury yield curve signals stresses ahead (10Y/3m US Treasury: -66 bps). In our view, equity and bond volatility is set to continue until inflation data allow central banks to, at least, slow tha pace of rate increases.
The Federal Reserve on December 14th is likely to decelerate the pace of interest rate hikes to +50 bps, instead of +75 bps steps in each of the past four meetings, to a range of 4.25% - 4.5%. New economic projections, including the appropriate path for FFR, and Chair Powell’s comments will be top of mind for investors.
In September, the median FFR pointed to 4.6% by end-2023, with Chair Powell having hinted at a probable upward revision due to, inter alia, stronger inflation, with a significant risk of a 50-bps upward shift to 5.125%. PCE inflation is on a path to average +5.8% yoy in Q4:2022 versus a FOMC projection in September of +5.4% yoy and +2.8% yoy in Q4:2023.
Revisions to 2023 real GDP will likely indicate weaker economic activity. The median FOMC projection in September for US GDP growth pointed to +1.2% year-over-year growth in Q4:2023, with a significant risk of declining around +0.5%.
On the other side of the Atlantic, the interest rate hike size is a close call (+50 bps vs +75 bps) after steps of +75 bps in the previous two ECB meetings (current Deposit Facility Rate: +1.5%, Main Refinancing Operation Rate: +2%, three-month Euribor: +2.05%).
Guidelines on the reinvestment policy of the APP portfolio -- current holdings of €3.25 trillion or 25% of euro area GDP -- are likely to be released. The quarterly ECB economic projections will also be watched, particularly for inflation. In September, CPI inflation was projected at +8.1% yoy on average in 2022 and +9.2% in Q4:2022 (average so far in 2022: +8.3% and average so far in Q4:2022: +10.3%), before decelerating to +5.5% in 2023 and to +2.3% in 2024 (target: +2%).
Lower natural gas prices (45% of euro area Energy CPI, including electricity prices), lower brent crude oil prices (45% of euro area Energy CPI), the appreciation of the euro exchange rate, as well as downward revisions to real GDP growth (2023: +0.9% in September) could support inflation returning to target by the end of the forecasting horizon. Note that current market pricing for natural gas and oil prices has decreased by -39% and -11%, respectively, compared with September’s assumptions (€121/MWh for 2023/2024 versus €200/MWh in September and $77 per barrel for 2023/2024 versus $87 per barrel in September). In a similar vein (negative for inflation), EUR/USD market pricing has moved up to 1.08 for 2023/2024 versus 1.01 in September (+7%).
Key Takeaways
Global equity markets lost ground in the past week, mainly due to profit-taking ahead of major central bank meetings. The S&P500 fell by -3.4% wow, followed though by an increase of +1.4% on Monday December 12th. Softer-than-expected US CPI data on Tuesday (+7.1% yoy vs +7.5%) supported equities further.
Note that price-to-earnings multiples of 17.1x (12-month forward) remain significant above the long-term average ratio (15.5x), suggesting that equity investors are relative optimistic. On the other hand, the inverted US Treasury yield curve signals stresses ahead (10Y/3m US Treasury: -66 bps). In our view, equity and bond volatility is set to continue until inflation data allow central banks to, at least, slow tha pace of rate increases.
The Federal Reserve on December 14th is likely to decelerate the pace of interest rate hikes to +50 bps, instead of +75 bps steps in each of the past four meetings, to a range of 4.25% - 4.5%. New economic projections, including the appropriate path for FFR, and Chair Powell’s comments will be top of mind for investors.
In September, the median FFR pointed to 4.6% by end-2023, with Chair Powell having hinted at a probable upward revision due to, inter alia, stronger inflation, with a significant risk of a 50-bps upward shift to 5.125%. PCE inflation is on a path to average +5.8% yoy in Q4:2022 versus a FOMC projection in September of +5.4% yoy and +2.8% yoy in Q4:2023.
Revisions to 2023 real GDP will likely indicate weaker economic activity. The median FOMC projection in September for US GDP growth pointed to +1.2% year-over-year growth in Q4:2023, with a significant risk of declining around +0.5%.
On the other side of the Atlantic, the interest rate hike size is a close call (+50 bps vs +75 bps) after steps of +75 bps in the previous two ECB meetings (current Deposit Facility Rate: +1.5%, Main Refinancing Operation Rate: +2%, three-month Euribor: +2.05%).
Guidelines on the reinvestment policy of the APP portfolio -- current holdings of €3.25 trillion or 25% of euro area GDP -- are likely to be released. The quarterly ECB economic projections will also be watched, particularly for inflation. In September, CPI inflation was projected at +8.1% yoy on average in 2022 and +9.2% in Q4:2022 (average so far in 2022: +8.3% and average so far in Q4:2022: +10.3%), before decelerating to +5.5% in 2023 and to +2.3% in 2024 (target: +2%).
Lower natural gas prices (45% of euro area Energy CPI, including electricity prices), lower brent crude oil prices (45% of euro area Energy CPI), the appreciation of the euro exchange rate, as well as downward revisions to real GDP growth (2023: +0.9% in September) could support inflation returning to target by the end of the forecasting horizon. Note that current market pricing for natural gas and oil prices has decreased by -39% and -11%, respectively, compared with September’s assumptions (€121/MWh for 2023/2024 versus €200/MWh in September and $77 per barrel for 2023/2024 versus $87 per barrel in September). In a similar vein (negative for inflation), EUR/USD market pricing has moved up to 1.08 for 2023/2024 versus 1.01 in September (+7%).