HomeContributorsFundamental AnalysisWeekly Focus - Central Banks Push Brakes on Rate Hike Speculation

Weekly Focus – Central Banks Push Brakes on Rate Hike Speculation

The past week shed some light into central banks’ thinking amid growing stagflation fears around the world, and the general message was at least somewhat to the dovish side. At the same time, market’s inflation fears appear to have moderated slightly, with 5y5y inflation expectation rates falling below 1.9% in Europe and 2.5% in the US, providing support to the transitory camp of the inflation discussion.

Fed announced the widely expected tapering of their asset purchase program, with the pace of USD15bn per month from mid-November, indicating an end to the purchases by next June. While we got no updated projections from the interim meeting, Powell sounded generally dovish, trying to slightly push against the markets aggressive pricing, yet still acknowledging the increased upside risks to inflation. We see the taper as a beginning of a hiking cycle, and look for two Fed hikes next year, read our more in-depth take in Fed Research – Review: Tapering marks the beginning of a tightening cycle, 3 November.

US macro data also surprised to the upside with payrolls growth of 531,000 in October and upwards revisions to previous months. However, employment is still 4.2m below pre-COVID levels. US ISM Services reached an all-time high at 66.7 (from 61.9). While supplier’s delivery times continued to increase for both the Manufacturing and Services PMIs, especially Services index was also supported by strong growth in business activity and new orders.

Against markets’ hawkish pricing, Bank of England refrained from hiking rates this week, although it still signals that rate hikes will come at a later stage. Inflation is seen peaking at 5% next April, but labor market developments will be key to follow for gauging the upcoming hiking pace, we look for a 15bp hike in February, followed by two more 25bp hikes in 2022, read more in UK Research – Bank of England Review: Unchanged but hikes are coming, 4 November.

Reserve Bank of Australia also maintained a dovish view, and while the April 2024 yield cap was ended, RBA only pointed towards the first hike in 2023. On the contrary, central banks in Eastern Europe continued their aggressive hiking, with the National Bank of Poland first hiking by 75bp and Czech National Bank following with 125bp. Norges Bank‘s interim meeting was among the less eventful ones this week, read more in the scandi section below.

The upcoming week is light in terms of data releases, with focus also on the central bank speeches following this week’s meetings. US CPI for October will be released on Wednesday, with market looking for signs of increasing pass-through of high raw material, component and labor costs into consumer prices. In the Euro Area, German ZEW will give us the first glimpse on the November growth momentum, while the EU commission will release their new forecasts on Thursday, including the latest draft budget projections.

For China, the October trade data released on Sunday is expected to display continued high trade surplus supported by robust exports and weakening imports amid the domestic slowdown. The high surplus is likely a key factor supporting CNY despite the recent uncertainties. Inflation data will also be released on Wednesday, with focus on the PPI currently at the highest levels in 26 years, and where we look for a further rise to 12.3%.

Full report in PDF.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Featured Analysis

Learn Forex Trading