Stocks go up as the US inflation print surprises market participants, but we cannot forget about other important events this week, which are three key decision of three key central banks. Even if today's US infation print seems to cement the 50bp rate hike, UK economy is still ahead of CPI inflation print. In the same time it's still not sure which variant European Central Bank is going to choose on Thursday and, what's event more important, what's beyond. Today, we're delighted to hear from John Hardy, Head of FX Strategy at Saxo Bank.
BoE is expected to hike the rate by 50bp on Thursday, but the day before CPI inflation data is published - would you expect a hawkich pivot if CPI bounces back above November print?
John Hardy, Head of FX Strategy at Saxo Bank: BoE: I don’t think any single inflation print will unsettle the BoE here, just look at the huge recovery in sterling from the lows, which will help stabilize inflation relative to other countries just as sterling weakness was making the situation worse until recently. Already in early November, the BoE were saying that they were unlikely to take the rate as high as the market expects next year, so given the further encouragement from a strongly recovering sterling and lower natural gas and petrol prices, I don’t expect fireworks in the guidance even if inflation proves a bit hotter then expected.
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December Fed decision seems to be sealed, but on Friday UMich and PPI data gloomed the picture of the US Economy a little bit. Are you of the opinion Fed will permanently shift to 50bp hikes until the end of cycle?
Fed: The Fed will hike by 50 basis points on Wednesday and would likely hike in smaller 25-basis point increments thereafter unless inflationary pressures re-emerge (something the market is not at all anticipating and would take considerable time to develop anyway – a “slower fall” in inflation than expected is the worst case scenario barring new shocks). For the FOMC meeting, the market is more looking at where the Fed forecasts its policy rate will be at the end of 2023 than at the size of the hikes, as well as where the Fed expects growth/inflation/employment data will be next year for a sense of how much economic weakness would be required for the Fed to stop hiking and eventually cut. Still, the market has a strong forward view on steeply falling inflation and growth and will react the most to incoming data. That view on incoming data has the already expecting rate cuts from the Fed starting as early as Q4 of next year, which suggests it is willing to ignore much of what the Fed says if the guidance is intended for anything beyond the next two or three meetings.
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ECB decides on interest rate this week - what do you expect from the Bank this time? When could the cycle come to an end?
ECB: The ECB is set to hike 50 basis points, which will take the deposit rate to 2.00%. Whether they hike another 50 basis points or step down to 25 basis point hikes thereafter is the question. Europe is already in recession and expected to be in recession next year. I don’t expect much above 2.50% for this cycle from the ECB for the peak policy rate – getting higher would likely require a reacceleration of inflationary pressures and its too early for that to unfold in the near future, when a drop-off in inflation is on course.
