In December, the Fed maintained a tougher rhetoric than the market consensus, playing on the bears' side
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BoE is expected to hike the rate by 50bp on Thursday, but the day before CPI inflation data is published - would you expect a hawkish pivot if CPI bounces back above November print?
The annual price growth rate in the UK fell slightly in November to 10.7% from a peak of 11.1% a month earlier. This reversal coincides with earlier trajectory estimates from the Bank of England, so it should not cause a meaningful change in the commentary. On the other hand, the Fed continues to surprise markets with more hawkish rhetoric, even with five months of slowing consumer prices under its belt. Key central bankers are pushing the idea of a more protracted and decisive fight against inflation into the markets at this stage. In contrast, markets are set to repeat post-2008 history, when the central banks' primary concern was stimulus but not suppression of inflation.
Santa Rally: Would Santa skip coming to town amid turbulent times and uncertain beginning of the next year?
Turbulent times do not rule out periodic and strong rallies against the trend. However, the Fed could now be the Grinch who wants to steal the holiday in the markets. Since the second half of November, the broad stock indices (S&P 500, Russell 2000) have been struggling with resistance against the downtrend. In August, the Fed decided the fate of this battle by siding with the bulls. In December, the Fed maintained a tougher rhetoric than the market consensus, playing on the bears' side. However, market dynamics show that there are fewer sellers anymore.
ECB decides on interest rate this week - what do you expect from the Bank this time? When could the cycle come to an end?
The ECB will raise the rate by 50 points, not wanting to surprise the markets. In addition, we should expect indications of further policy tightening via a plan for asset sales from the balance sheet and rate hikes. Currently we expect the ECB to raise rates up to Q3 2023. From the second quarter, it could be a rate hike of 25 points. At the same time, there are many surprises along the way as de-globalisation will contribute to higher inflation in the region and force the ECB to take a more hawkish approach in contrast with zero rates after 2016.
