There has been plenty of musing, rumbling and machinations last week that central banks around the world will start to slow the pace of rate rises.
It’s a reasonable conclusion, the RBA fired the gun on this idea at its October meeting and may continue that trend this Tuesday when it meets for its penultimate meeting of 2022. This is despite hot inflation figures suggesting it could jump back up the notches to 50 basis points. The Bank of Canada surprised the market with ‘just’ a 50-basis point rise rather than the expected 75-basis point rise.
This has lead the market to believe that hard hawk such as the RBNZ and the Federal Reserve could follow suit. Both have been highly aggressive in their actions. The data from the US last week supports that idea to some extent as US houses prices, consumer confidence and the Richmond Fed manufacturing index collapsing to -10 with every metric in the report contracting.
The question from all this is – yes, there is a possibility of slowing rates – but slowing does not mean stopping.
If we take the Fed funds futures the market has the rate reaching 456 basis points after the final FOMC meeting of the year – that’s 130 plus basis point from where the board has the federal funds rate now.
Then there are those playing catch up. The ECB raised its policy rates by 75-basis points as taking it’s deposit rate to 1.5 per cent and its refinancing rate to 2.0 per cent the highest level in over a decade. It then processed to lay out the frameworks for further rises in the come months but it to will do it at a slow pace having drop this line “next several meetings” from its statement. It did state that ”With this third major policy rate increase in a row, the Governing Council has made substantial progress in withdrawing monetary policy accommodation…Based on its current assessment, over the next several meetings the Governing Council expects to raise interest rates further”. President Lagarde said that “we have more ground to cover” and they could still hike for “several meetings”.
So where has this left FX? USD eased over the week EUR/USD was $0.97 but rose $0.9965 by the end of the week. GBP/USD is up to $1.1565 on the UK’s new Prime Minster and some fiscal restraint but it was higher mid-week suggesting the honeymoon is being questioned.
USD/JPY ranged between ¥145.10 and ¥146.90, as US yields eased and news the BoJ is defending the ¥150 level. While AUD/USD added 3 cents over the week on CPI data and the prospect of later rate rise on Tuesday closing near $0.6520.
But the closing thought remains – will the FOMC slow down its rate rise path? All communication suggests not but that doesn’t mean it’s set in stone.