Shane O'Neill, Head of Interest Rate Trading
The last month may have been a pivotal one in the central bank story post-Covid. All three central banks came to market and although their change in stance was minor, if anything, it coincided with cooling economic data.
The ECB were first up and fulfilled market expectations by keeping rates on hold at 4%, they also made no change to PEPP reinvestments and stated that reinvestments will continue as per until end of 2024. In the released statement the committee said that “the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal,” the goal being lower inflation. Increasing the likelihood that the status quo won’t be changed in the immediate future. In the presser, Lagarde pushed back against cuts, saying such talk was “premature”. She did, however, reiterate that the committee’s decisions will remain data dependant and they are seeing signs of economic slowdown which should lead to inflation falling.
This feeling was validated in the following week as EU inflation and growth figures were released. Total Eurozone GDP eked out 0.1% growth YoY, coming in under market expectations and weighed upon heavily by German contraction of 0.8%. This did seemingly help the inflation situation with German inflation falling to 3.8% and total Eurozone inflation falling to 4.2%. Pushing the market to reprice rates and consider that perhaps talk of cuts isn’t so “premature” after all. The first cut is now priced in by April next year.
Following the ECB we had the Fed – they also kept rates on hold, in line with market expectations.
Much of the Fed’s statement had a similar theme to the ECB – we’re happy at these levels and we’re set to stay here. But there were some new dovish tilts – in the comments there was talk of tighter financial conditions and in the statement from Powell he reiterated that the current policy was indeed restrictive. Ever keen to keep balance, Powell did try and keep a December hike on the table (current market pricing gives this no chance) and stated that “likely we will need to see some slower growth and softening in the labour market conditions”.
And, again just like Europe, labour data last Friday may have been the start of just what Powell was looking for. NFPs came in at 150k, under the 180k markets were expecting and last month’s blockbuster number was revised down by some 40k jobs. Leading one bank economist to remark on the Fed’s cycle “put a fork in it – they are done”.
Lastly, we had the BoE and again they fulfilled market expectations and kept rates on hold. Although they were the arguably the most hawkish of the trio – 3 members voted for a hike, inflation forecasts show price growth still above target in 2 years' time – markets are sceptical that Bailey and co will dare hike as others are standing still or even cutting. As such, markets priced the chances of another hike this cycle down from 35% before the meeting to 25% now.
Markets seem exceptionally keen to get cuts priced in, and whilst we still feel this may be too soon, recent data has certainly made the argument more interesting.
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