There are several high-frequency data points that often provide trading fodder for short-term participants, including the US , , , and . Eurozone sees January and numbers. Japan is good for February and . China gives February readings on , , and . However, the meetings of the central banks take oxygen: the , the , and the . Two central banks from emerging markets meet and will also attract attention: Turkey and .
Federal Reserve: The FOMC decision has three dimensions. The first is rising rates; the tightening cycle will begin. A 25 basis point move was well telegraphed. Prior to the US warning on Feb. 11, the market had discounted an 80% chance of a 50 basis point move. We’re not convinced the Fed’s leadership was there in the first place, but clearly it isn’t now. That said, Chairman Powell is preserving maximum functioning and has explicitly not taken 50 basis point moves off the table in this cycle. The Fed funds futures strip reflects this. The FOMC may not deliver the 100bp hikes the hawks want in the first half, but the market priced it in by the end of July.
Second, there are the forward guidance on its balance sheet. Powell appeared to suggest in his recent congressional testimony that some additional details about his strategy would be represented. In any case, it seems likely that the Fed will take the passive approach and allow the balance sheet to contract, which means extinguishing some reserves by not reinvesting all maturing products. Logan, who heads the Fed’s market operations, recently said Treasury major payments (maturing issues) ranged from about $40 billion to $150 billion per month over the next few years and averaged $80 billion. of dollars. At the same time, there is an average of around $25 billion worth of MBS, also maturing in one month over the next few years.
The third is the summary of economic projections, the dot chart. Individual projections of the target federal funds rate are attracting the most attention. In mid-December, 10 of 18 officials expected 75 bps of hikes to be appropriate this year. Five others were aiming for 50 basis points. There was a dove that thought only one rate hike should be delivered this year. The two most hawkish “points” anticipated a 100 basis point tightening.
Also take into account the terminal tariff. In December, five officials expected the federal funds target at the end of 2024 to be above the median considered at the long-term equilibrium rate of 2.5%. The median is expected to rise 50 bps and possibly 75 bps this year. Recall that before the virus hit, the Fed had cut its rates three times to 1.50%-1.75% (June, July and October). The swap market sees Fed front loading tightening and peaking at around 2% by the end of 2023.
Finally, be aware that following recent meetings, the equity market initially rallied on the statement. However, the market recently reversed during Powell’s press conference. It seems to sound more hawkish than the statement. We are not convinced that is the case. It felt a little more like a Rorschach test of Powell pursuing maximum operational flexibility. The president also acknowledged weaker growth in the first quarter after a 7.1% increase in inventories in the fourth quarter. As in Q3-21 (growth slowed from 6.7% to 2.3%), the slowdown in Q1 is probably not the prelude to another weaker quarter. Instead, growth is expected to be 3.5% to 4.0% in the second quarter before slowing in the second half to around 2.7%, according to the median forecast from a Bloomberg survey. Downside risks appear to be increasing.
Bank of England: The most likely scenario is for the Bank of England to deliver a 25bp hike on March 17th. On the eve of the US warning that Russia was preparing to attack Ukraine, the swap market had a little over 60% chance of a 50bp rise. raise. Ratings gradually fell, and at one point early in the month the market even questioned a 25 basis point rise. The MPC vote was 5-4 in favor of 25 basis points in February, with Governor Bailey casting the deciding vote. The market has just over 130 bps of upside discounted over the next six months. After that, the swap market has about 40 basis points of tightening before peaking.
The BOE’s balance sheet is expected to shrink this month as maturing assets of GBP 28 billion will not be reinvested. When the base rate hits 1.0%, probably in May, the BOE could begin to reduce the balance sheet by divesting its holdings. However, officials don’t seem to be in a rush to take the more active route. Indeed, with rising energy prices, and more broadly inflation, rising NHS taxes (April 1) and rapidly rising rates (without long term fixed rate mortgages), the economy will be stretched to the point of possible breaking. Chancellor Sunak’s spring statement (March 23) will be delivered amid growing doubts that fiscal rules will actually be adhered to.
The UK will release February figures and January data a few days before the BOE meeting. Average three-month (year-over-year) earnings growth has halved since peaking at 8.8% last June. It had fallen to 4.2% in November before rising to 4.3% at the end of 2021. increased by 5.5% in January and is still accelerating strongly. Real profit growth is collapsing. It is reasonable to expect that consumption will not be far behind. And the Tories looked vulnerable ahead of May’s local elections even before the sharp economic deterioration took place.
Bank of Japan: Around the time the Bank of Japan meeting kicks off on March 17, the February CPI will be released. Headline inflation will be boosted by soaring energy and food prices. After rising 0.5% year over year in January, an acceleration to 1.0% should come as no surprise. The , which excludes fresh food prices, is also expected to ease from January’s 0.2% pace to 0.5%-0.6%. The real inflationary impulse comes from the exclusion of fresh food and energy. It will most likely remain well below zero after January’s reading of -1.1%.
In April, there will be more upward pressure on the core metrics as mobile charges that were cut sharply last year fall out of the 12-month comparison. This could be particularly acute and has the potential to lift the headline CPI measure by more than one percentage point. Although the BOJ has little to do or say, Governor Kuroda could get ahead; acknowledging (removing or minimizing the element of surprise) and explaining why this alone will not divert the central bank from its course.
Last month, the BOJ showed it was ready to defend the 25bp Yield-Curve-Control cap on yield. The bond purchases seen since the beginning of the war pushed the yield up a little to 0.15%. The market is likely to question the BOJ’s resolve amid rising global rates and accelerating headline inflation. Meanwhile, political (Upper House elections in late July and government approval ratings are low) and economic considerations suggest Prime Minister Kishida could cobble together a new spending bill, even if he reallocates and redefines priorities of unspent funds from previous budgets. .
Brazil and Turkey:
Banco do Brasil meets on March 16. The economy grew 0.5% in Q4-21, slightly better than expected, and followed two quarters of small contractions. However, the economy seems fragile at the start of the year. The manufacturing sector, in particular, seems softer. The level was below the 50 boom/bust level for the fourth straight month in February and fell 2.4% in January, the biggest decline since March 2021.
The is the strongest currency in the world here at the start of 2022, up 10%. Its strength seems to come from two considerations. First, it experiences a favorable terms-of-trade shock from soaring food and industrial commodity prices. The 12-month moving average is about $1 billion a month higher than a year ago. Second, high interest rates and exposure to commodities attract foreign portfolio investment.
The central bank was one of the most aggressive in raising rates. The Selic rate started last year at 2.0% and ended at 9.25%. The pace of increases started at 75 basis points from March to June 2021 (three times) and increased to 100 basis points (twice) in the third quarter. The pace accelerated to 150bps in Q4 21 and February (three times). The Selic rate stands at 10.75%. IPCA inflation is close to 10.50%. Most are expecting a 100 basis point increase at this week’s meeting. The swap market is now seeing the peak of the Selic later this year, near 13.5%.
Turkey’s central bank meets on March 17. He is unlikely to change his 14% one-week repo rate. Soaring energy and food prices pose new challenges to Turkey’s beleaguered economy. is already close to 54.5% (core 44%). The rate is around 9.75% so far this year and probably needs to drop 4.0% to 5% per month to compensate for the inflation differential. Or, to put it another way, with a nominal depreciation of less than 5%, the lira would appreciate in real terms. At the same time, rising food and energy prices will weaken growth even if it boosts inflation, and the weaker pound is exacerbating price pressures. It is caught in a vicious circle, which would be difficult even for the best leaders with the strongest institutions. Moreover, the beneficial impact on the external imbalance of the past depreciation of the lira will probably be offset by the surge in food and energy prices. Social tensions are likely to increase.