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Following an eventful week and post-meeting communications fine-tuning by officials, the dust has finally settled. Circumstances have clearly made it easier for the Fed to land its message while the European Central Bank has had limited success so far in extending the reach of its hawkish intentions beyond the next few months
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| ECB President Christine Lagarde and Fed Chair Jerome Powell |
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The Fed unlikely to be fussed by the market
The past days have given policymakers plenty of opportunity to refine their policy stance after the previous week had seen outsized market gyrations in the wake of the central bank meetings and then the US jobs data.
With regards to the Fed, Chair Powell had largely confirmed the message he had previously conveyed at the press conference. The latest speakers have added only a somewhat more hawkish tone stressing that rates could remain higher for longer. And as the Fed’s Waller added, if financial conditions were to loosen, the response could be faster policy tightening than the 25bp currently envisioned.
US markets have shifted their rates expectations higher by about 20bp compared to before the Fed meeting
Taking into consideration all of the above, US markets have shifted their rates expectations higher by about 20bp compared to before the Fed meeting, placing the terminal rate at about 5.10%. However, the amount of cuts expected through the end of 2024 was little changed at close to 200bp despite the officials’ emphasis that rates may have to stay higher for longer.
Indeed, judging by the smaller increase of medium to longer term OIS real rates by 5bp to 8bp versus the beginning of last week, financial conditions have tightened only moderately since the Fed meeting. But importantly they have not dropped and are roughly aligned with their average over the past two months.
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Broader financial conditions have eased but real USD rates have barely budged
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ECB: Salvaging the last meeting's hawkish intent was only modestly successful
Arguably the ECB’s press conference probably required a bit more fine-tuning to the initial market reaction of dropping rates. The latest bits of communication in this regards have come from an outspoken hawk, Klaas Knot, warning that the current pace of 50bp hikes may have to be maintained into May. Vice President de Guindos, who reflects a more centrist position within the Council, cautioned markets may be too optimistic about the inflation trends and he would not rule out hikes after March.
the ECB’s press conference probably required a bit more fine-tuning to the initial market reaction of dropping rates
Comparing latest money market curves to where they were at the beginning of last week just ahead of the policy meeting does not suggest that ECB officials have been able to increase the reach of its hawkish message. The 1m ESTR OIS forwards for the next few months have risen by more than 10bp since then, but beyond that forwards are little changed, if not even a tad lower. The terminal rate itself has nudged only 4bp higher to 3.44% whilst the amount of policy easing expected through 2024 thereafter has slightly increased to a cumulative 93bp.
With markets shorter to medium-term inflation expectations as measured by inflation swaps having risen to a greater extent, the OIS real rates out to 10y have actually dropped by 10 to 4 basis points, signalling slight net loosening of financial conditions. Not a desirable outcome for policymakers who consider their job far from being done, but also not catastrophic with real rates still above the recent average.
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The ECB's hawkish pushback has kept real EUR rates positive
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One measure to judge them all
Of course the one benchmark against which all central banks will eventually be measured is the decline in inflation. With regards to the US we will get the University of Michigan’s survey of consumer inflation expectations tomorrow and of course the next set of CPI data next week. While the former is anticipated to show a slight uptick on the one year measure, the CPI itself is seen continuing on its downward trend.
The ECB can be seen stuck in the catch up phase being confronted with stubbornly high underlying inflation pressures
That puts the Fed in a more comfortable position, in the eyes of the market more of a fine-tuning stage of its policy stance, whereas the ECB can be seen stuck in the catch up phase being confronted with stubbornly high underlying inflation pressures. That increases the risk that hawkish rhetoric as well as action will eventually have to ratched up further.
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Today's events and market view
In the eurozone, Germany’s inflation data was probably the most anticipated release of the week with little else on the data calendar of note. At 9.2% the EU-harmonised measure is lower than the 10% median estimate but much higher than the 8.6% used by Eurostat in their HICP estimate last week. Main focus now is on the US initial jobless claims as markets will try to get a better grip on the state of the labour market.
There are more ECB speakers scheduled today though only after the end of the European trading session. With Bundesbank’s Nagel we will see another more prominent hawk, but also more dovish to moderate members with de Cos and again VP de Guindos.
Main highlight on the central bank front today is the BoE, where Governor Bailer and MPC members Pill, Tenreyo and Haskel appear before teh Treasury committee. At the last meeting the Bank shifted its rhetoric and signalled it was near end of its hiking cycle.
In supply last night’s US 10y note auction was another display of strong demand with bid cover of 2.66 even topping January auction. Notable was the record-high allocation to indirect bidders, a proxy for foreign investor demand in the auction. Tonight the Treasury will auction its 30y bond.
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