Global Courant 2023-05-29 07:38:24
Traders react when Federal Reserve Chairman Jerome Powell is seen making comments on a screen on the floor of the New York Stock Exchange (NYSE) in New York City on March 22, 2023.
Brendan McDermid | Reuters
The market has long priced in major central bank interest rate cuts towards the end of 2023, but stubborn core inflation, tight labor markets and a surprisingly resilient global economy are leading some economists to reassess.
Stronger-than-expected US job data and gross domestic product data have revealed a key risk to the Federal Reserve that could put the foot off the monetary brake. Economic resilience and continued tightness in the labor market could put upward pressure on wages and inflation, which threaten to anchor.
The overall US consumer price index has cooled significantly since peaking above 9% in June 2022, falling to just 4.9% in April, but remains well above the Fed’s 2% target. Crucially, core CPI, excluding volatile food and energy prices, rose 5.5% a year in April.
Earlier this month, when the Fed pushed its 10th rate hike since March 2022, raising the Fed Funds rate to a range of 5% to 5.25%, Chairman Jerome Powell hinted that a pause in the hiking cycle is likely at the meeting from the FOMC in June. .
However, the minutes of the last meeting showed that some members still see the need for additional increases, while others expect a slowdown in growth to make further tightening unnecessary.
Fed officials, including St. Louis Fed President James Bullard and Minneapolis Fed President Neel Kashkari, have indicated in recent weeks that continued core inflation may keep monetary policy tight for longer and more rate hikes could come later in the year.
The personal consumption price index, a preferred gauge for the Fed, rose 4.7% yoy in April, new data showed Friday, pointing to further stubbornness and further bets on higher for longer interest rates.
Several economists have told CNBC in recent weeks that the U.S. central bank may be forced to tighten monetary policy more aggressively in order to make a breakthrough in persistent underlying dynamics.
According to the CME Group’s FedWatch tool, the market currently estimates a near 35% probability of the target rate ending the year in the 5% to 5.25% range, while the most likely range by November 2024 is 3.75% up to 4%.
Patrick Armstrong, chief investment officer at Plurimi Group, told CNBC last week there was a two-sided risk to the current market positioning.
“If Powell cuts, he’s probably cutting way more than market prices, but I think there’s more than a 50% chance we’ll make it to the end of the year if he just sits on his hands,” Armstrong said.
“Because the services PMI is incredibly strong, employment is incredibly strong, and consumer spending is all strong — it’s not the kind of thing that the Fed should really be pumping liquidity into unless a debt crisis hits.”
European delay
The European Central Bank faces a similar dilemma after slowing the pace of its hikes from 50 basis points to 25 basis points at its May meeting. The bank’s benchmark interest rate is 3.25%, a level not seen since November 2008.
Eurozone headline inflation rose to 7% year on year in April, though core price growth delivered a surprising slowdown, sparking further debate over the pace of rate hikes the ECB should follow as it looks set to seems to bring inflation back up to par. Soil.
The eurozone economy grew 0.1% in the first quarter, below market expectations, but Bundesbank president Joachim Nagel said last week that several more rate hikes will be needed even if that slows down the bloc’s economy plunge into recession.
“We are in a not easy phase, because inflation is sticky and not moving as we would all hope, so it is very important, as Joachim Nagel said today, that the ECB remains open to further rate hikes for as long as it takes .” until the drop-off is done,” former Bundesbank board member Andreas Dombret told CNBC last week.
“Obviously this will have negative implications and also negative effects on the economy, but I strongly believe that if you let inflation (unanchor), if you let go of inflation, those negative effects will be even greater, so it’s very important for the credibility of the ECB that the ECB stays on track.”
The Bank of England
The UK faces a much tougher inflation challenge than the US and the Eurozone, and consumer price inflation in the UK fell less than expected in April.
The annual consumer price index fell from 10.1% in March to 8.7% in April, well above consensus estimates and the Bank of England forecast of 8.4%. Meanwhile, core inflation rose to 6.8% from 6.2% in March, raising concerns for the Bank’s Monetary Policy Committee.
With inflation proving to be more stubborn than the government and central bank had hoped, now nearly double the comparable rate in the US and significantly higher than in Europe, traders raised bets that interest rates must be raised further to limit price increases .
“Supply shocks, still unanchored inflation expectations, fewer promotional discounts and some potential margin build-up are likely to prevent prices from normalizing as quickly as traditional models would suggest,” said Sanjay Raja, UK chief economist. German Bank.
“We now expect a slower decline from target, and with price and wage inflation now likely to remain stronger than expected, we are raising our forecast for final interest rates to 5.25%. Risk management considerations will, we believe, forcing the MPC to raise interest rates and further than previously intended.”
Deutsche Bank now sees monetary policy shifting “firmly” to a “longer higher” era, Raja added.
The market now estimates a 92% chance of a further rate hike of 25 basis points by the Bank of England at its June meeting to take key bank rates to 4.75%, according to data from Refinitiv on Friday afternoon.
But despite the expectation that interest rates will continue to rise for longer, many economists still see a complete price reversal before the end of this year.
Berenberg had previously predicted three cuts by the end of 2023, but reduced this to one in response to last week’s inflationary pressures.
The German bank maintained its end-2024 call for a 3% rate unchanged, with six cuts of 25 basis points over the course of next year, but also set a 30% probability of a further 25 basis point hike in August to lower bank rates. decrease to 5%.
“Policy changes operate with uncertainties and variable lags. Due to the shift from floating rate mortgages to fixed products over the past decade, the pass-through from monetary policy to consumption via the housing market is taking longer than in the past,” said Berenberg Senior Economist Callum Pickering.
“This highlights the risk that, if the BoE overreacts to short-term inflation surprises, it could pave the way for a major undershoot in inflation once the full effects of its previous policy decisions become apparent.”
