Thoughts

January 13, 2023 | 15:14

Just Because the Fed Is Doing It ....

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Now that the Fed is gaining reassurance that inflation is coming down, attention is turning to other central banks. Will they or won’t they follow the Fed’s lead? After all, the Fed has already begun to moderate its pace of rate hikes, as headline (6.5%) and core (5.7%) inflation looks to have peaked already (versus the highs in June [9.1%] and September [6.6%], respectively).

Don’t expect the ECB to be so quick to change gears: it was only in December that headline CPI slipped back to single-digit territory and is still at a towering 9.2%, not too far from October’s record 10.6% rate. And core CPI (of 5.2%) is still the highest since records began in 1990. What’s the target? Oh yes, 2%. Not there yet! Certainly, the dive in natural gas prices to pre-invasion times is helping, big time (thank you, Mother Nature) but nearly every Governing Council member who spoke to reporters this week continued to sound hawkish. They ranged from Executive Board member Isabel Schnabel (hawk), who warned that rates “will still have to rise significantly at a steady pace” to return to 2%, to the less hawkish types, such as Spain’s Pablo Hernandez de Cos and Greece’s Yannis Stournaras, who stressed that rates need to keep rising “significantly”. But a severe recession may have been avoided.

Then there is the BoE. It has the extra weight of knowing that the economy shrank already (by 1.2% a.r.) in Q3 and it looks like things probably worsened a bit in Q4. Yes, real GDP actually firmed for the second month in a row (surprise!), up 0.1% in November; but it fell after smoothing out the monthly wiggles, or down 0.3% in the three months to November, following a downward revision to the prior period (to -0.4%, instead of -0.3%). The boost came from services, which rose for the second straight month, or by 0.2% in November, although it slipped 0.1% on a 3-month moving average basis. The monthly rise was due to the World Cup. Meantime, the slowdown still hasn’t made a real dent yet in inflation. At last check, U.K. inflation increased at a record pace of 11.1% in October, and only slowed ever-so-slightly to 10.7% in November. That works out to 4 out of the past 5 months of over 10% inflation readings, or 5x the official target. Next week, watch for November wage growth and December CPI, to help settle the decision for the next rate meeting.

Note that, once again, the ECB and the BoE will make their monetary policy announcements on the same day (February 2). And once again, we look for both to raise rates 50 bps. Their time to moderate the pace of rate hikes, though, is coming.

The BoJ is also holding its 2-day monetary policy meeting next week. After tweaking the band around the 10-year JGB yield (now +/-0.5 ppts around 0%), markets are no longer ignoring this still-dovish-but-not-to-the-same-extreme-as-it-once-was central bank. At that time, the JPY swung from ¥137 to ¥132, and 10-year yields jumped from 0.25% to nearly 0.5%. What is discussed next week will be of great interest, particularly as Tokyo CPI hit a 40-year high of 4% in December, Uniqlo will raise salaries by as much as 40% come March, and the Bank raised its economic assessment for four of Japan’s nine regions (the rest were maintained). It is possible that the debate around Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control will result in more fine-tuning of policy.