Market Stumbles 

Stocks in Europe fell on Thursday after Wall Street posted a loss following the Federal Reserve’s latest rate hike. The FTSE 100 declined around three-quarters of a percent to 7,426, whilst the DAX and CAC both lost around 1% in early trading. In the wake of the Fed hike the dollar extended its decline to its weakest since June but has pared losses in early trading this morning. Treasury yields are pretty stead at 3.5% on the 10-year note. The Swiss National Bank followed the Fed in hiking by 50bps to 1%. Chinese retail sales and industrial production data missed estimates, highlighting the effects of covid policy which Beijing is loosening quickly. 

Hawkish Fed 

The Federal Reserve slowed up a bit but retained a hawkish stance, raising rates by 50bps as expected whilst emphasising the need to keep on keeping on. Lower-than-expected inflation readings for the last two months was brushed aside by the Fed, which is not about to think about thinking about rate cuts. The FOMC lowered its projection for GDP next year to 0.5% from 1.2% while its unemployment forecast rose to 4.6% from 4.4%. Importantly the terminal rate dot plot climbed to 5.1% from 4.6%, but this may need to go higher still.  

Fed chair Powell said: "Historical experience cautions strongly against prematurely loosening policy. I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way... we’re not in a sufficiently restrictive policy stance yet". This fits with my view that it’s higher for longer. Quit focusing on the pace and timing and look at the end point.  

Certainly, central banks are starting to look in the rear-view mirror a bit after hurtling at breakneck speed to raise rates this year. Now they slow a bit and see what catches up. What they see is reassuring in a sense – inflation has come down a bit in the US and UK. But it remains exceptionally high and in the Euro area it may not yet have peaked. So now they slow down to see what the lagging effects are but in fairly short order – a few months – they will realise that inflation is not going away.  

Other Central Banks Sing a Similar Tune 

Today, the European Central Bank is likely to raise rates by 50bps, but it could still opt for a more hawkish 75bps. ECB Executive Board Member Isabel Schnabel said recently: “Incoming data so far suggest that the room for slowing down the pace of interest rate adjustments remains limited, even as we are approaching estimates of the ‘neutral’ rate.” The doves on the Governing Council tend to hold sway and opting for 50bps with some relatively hawkish comments might be the tone. Minutes from the October meeting hinted at dovishness but the bank doesn’t want to send a signal it’s ready to pivot.  

The Bank of England is also expected to raise rates by another 50bps but continue to pull the dovish lever by saying markets are still pricing in too many hikes. Without a Super Thursday press conference, the focus will be on the vote split among the nine members of the MPC. At last month’s meeting, when the MPC backed a 75bps hike, two members, Silvana Tenreyro and Swati Dhingra, preferred a smaller hike. This vote could be even more widely split. With inflation showing signs of cooling and the Fed slowing down there is not the urgency to go for a jumbo hike, so a 50bps hike is preferred.  

Bullish GBP 

Sterling holds onto its bullish stance ahead of the BoE meeting, though GBPUSD has pulled back below 1.24 as the dollar catches bid across the board this morning. BofA: "With our base case for the Bank Rate path in line with market expectations, we expect the upcoming BoE meeting to have a minimal impact on GBP," BofA notes … We see risks in both directions but on balance dovish. This is primarily because we see risks around the February meeting skewed toward a 25bp rate hike. Still, we expect the BoE to keep its options open this week, reaffirming its data-dependent stance.”  

In Other News 

Also today watch US retail sales, Empire State manufacturing index and weekly unemployment claims. Meanwhile. Tesla declined again as it emerged that Elon Musk had sold a further $3.6bn in the stock this week, further reducing his stake to 13.4%. It’s the third share sale since declaring he wouldn’t sell any more. When do the bulls realise that the game is up?