As the annual Davos meeting took place last week, Blackrock’s Vice Chairman, Philipp Hildebrand, shared his perspective on the market’s perception of central bank monetary policy. In an interview, Hildebrand stated that he does not anticipate any reduction in interest rates this year, and at best, central banks will pause their current rate increases. He believes that for central banks to consider cutting rates, they must be confident that inflation expectations are not rising.
European inflation figures for December show a decrease in the inflation rate in the Eurozone to 9.2%, compared to 10.1% in November. However, core inflation has risen to 5.2%, compared to 5% in November. Despite this, there remains a significant variation in inflation rates among Eurozone countries, with Spain having the lowest rate at 5.5% and Latvia having the highest at 20.7%. The European Central Bank (ECB) has reiterated its stance on impending interest rate hikes, with ECB President Lagarde stating that inflation is currently “way too high” and that the ECB intends to “stay the course”. An ECB Board member, Knot, has suggested that the ECB plans to hike rates by 0.5% multiple times, which could lead to a narrowing of the interest rate differential between the euro, pound and USD, potentially resulting in a stronger euro. French bank Société Générale predicts that EURUSD could reach 1.2000 if the energy crisis subsides and the recession ends.
In the United States, James Bullard, the Fed chief in St. Louis, suggests that the Federal Reserve should lean towards a tighter monetary policy to prevent inflation from rising. He believes that the Fed should raise interest rates as quickly as possible to reach a 2% rate and then respond to data as needed. However, Federal Reserve Vice Chairman Lael Brainard indicates support for a return to more traditional interest rate increases of 0.25%. Recent data shows a 0.5% decrease in US PPI last month and a 1.1% decrease in retail sales. Despite this, core CPI remains firm at 5.69%.
The British Pound has had a mixed performance in the past week. ONS reported that UK average earnings have risen by 6.4% YoY, while inflation dropped from 10.7% to 10.5% YoY. However, consumers have cut back on Christmas shopping due to affordability concerns, leading to a 1% MoM decline in retail sales. The Bank of England Governor, Bailey, stated that the expected recession in the UK is likely to be long but “shallow”, despite recent GDP data indicating that the UK may have avoided a recession in 2022. He also stated that inflation in the UK is expected to fall “quite rapidly” by late spring. The next Bank of England rate decision on February 2nd could set the trajectory for sterling for 2023, as a 3-way voting split at the last meeting leaves the market uncertain of the BoE’s stance.
In the Rest of the World, the Bank of Japan maintained its ultra-easy monetary policy last week. USDJPY strengthened by 1%, but the strength was short-lived, leading to speculation that the BoJ may change its policy soon. The BoJ stated it would tighten its monetary policy when demand-pull/wage inflation is seen. BoJ Governor Kuroda is set to leave his post on April 8th, leading to speculation that his successor may tighten policy, encouraging yen strength.
What to watch:
Mon Jan 23
17:45 EUR ECB President Lagarde Speaks
Tue Jan 24
07:00 GBP Public Sector Net Borrowing
09:00 EUR Flash Reading Manufacturing & Services PMI
09:30 GBP Flash Reading Manufacturing & Services PMI
14:45 USD Flash Reading Manufacturing & Services PMI
Wed Jan 25
00:30 AUD CPI
15:00 CAD Bank of Canada Interest Rate Decision/Statement
16:00 CAD Bank of Canada Press Conference
Thu Jan 26
13:30 USD Advance GDP/Durable Goods/Goods Trade Balance
Fri Jan 27
13:30 USD Core PCE