I should admit that I thought the major event of this week would be Federal Reserve (Fed) President Jerome Powell’s speech and a dot plot from the FOMC members, which would look significantly more hawkish than the expectations, and a couple of eventless 50bp hikes from the other major central banks including the European Central Bank (ECB), the Bank of England (BoE) and the Swiss National Bank (SNB).
But the week’s central bank surprise came from Christine Lagarde yesterday.
Lagarde’s ‘whatever it takes’ moment
The ECB raised its interest rates by 50bp as expected yesterday, and hinted at the accompanying statement that there would be more rate hikes on the pipeline.
And President Christine Lagarde killed all hope that the ECB would take into account the slowing economy, and recession, when hiking rates.
Instead, Lagarde kept telling reporters that the rates in the Eurozone will continue to rise ‘steadily and significantly’ over the next meetings. She said that the ECB will raise the rates by another 50bp at the next meeting. Then by another 50bp in the meeting after that. And another 50bp in the meeting after that. Then another one!
No central banker has given such ‘forward guidance’ before. The idea of ‘meeting to meeting adjustment to the monetary policy’, the concept of ‘we will be watching the data to decide the next steps’ got hammered, yesterday. Christine Lagarde made the most hawkish speech since she came to the office. And yesterday’s meeting was one of the most important ones since Mario Draghi’s ‘whatever it takes’, back in July 2012.
Lagarde’s speech was the ‘reverse whatever it takes’, or the new ‘whatever it takes to bring inflation to 2%’.
And oh, the ECB will also start unwinding its balance sheet from March, but the officials sound like they don’t have a clue about how that will play out, because they have never done it before. This is what they said.
Merry Xmas!
European yields spikde during Madame Lagarde’s speech. The German 10-year yield jumped more than 10%. The French and the Spanish 2-year yield did the same. The Italian 2-year yield soared more than 13%.
Christine Lagarde’s speech also sent the markets to hell yesterday, and smashed whatever hope was left for a year-end stock rally.
The DAX and the CAC fell more than 3%.
Of course, the ECB’s hawkish announcements – that came a day after the Fed’s hawkish decision – wreaked havoc across the US equities as well. The S&P500 slipped below its 100-DMA, as Nasdaq fell below its 50-DMA.
Here in Switzerland, the SMI also paid the price of a 50bp hike from the SNB and the ECB. The index fell around 2.50%, although some breathed a sigh of relief that the EURCHF stayed relatively stable, not the get the Swiss franc more expensive for European clients.
Go, euro!
Even though the euro was relatively stable against the franc, the single currency got a nice initial boost from the ECB decision and especially Lagarde’s cruelly hawkish press conference against the US dollar.
The EURUSD spiked to 1.0736, the highest level since April, then gave in to the broadly stronger US dollar, and is back below the 1.07 mark this morning.
But the significant hawkish shift in ECB’s policy stance, and the determination of the European leaders to shot inflation to the ground should continue giving some more support to the euro, therefore, price pullbacks in EURUSD could be interesting dip buying opportunities for a further rally toward the 1.10 mark.
And if the US dollar strengthened yesterday, it was certainly due to a heavy selloff in stocks and bonds that ended up with investors sitting on cash. Other than that, the data released in the US yesterday was not brilliant! The retail sales fell by most in a year; holiday shopping apparently didn’t help improve numbers. The Empire Manufacturing index tanked from 4.5 to -11, versus -1 expected by analysts. Both data hinted at a slowing economic growth in the US, which should normally boost recession fears and keep the Fed hawks at bay. And that could mean a further downside correction in the dollar in the run up to Xmas.
