Hawkish Canaries and Sick Doves
A flurry of hawkish surprises in the macroeconomic data flow and central bank decisions reinforced our contrarian view that easing cycles will be short and promptly start being reversed. Indeed, we now expect the Fed’s next move to be a rate hike in 2026, with risks that it will come earlier, consistent with the long and embarrassing history of reversals after easing outside recessionary regimes. The 1998 scenario remains the most similar parallel.
Sickening doves in the UK was GDP data defying expectations by surging 0.4% m-o-m, flipping the expected sign on Q4 to grow by 0.1% q-o-q amid broadly positive performances across industry and services. We already called November the statistical bottom amid residual seasonality, which is turning higher into what should be a more resilient H1. That call remains on track. Statistical noise misled dovish rate views into seeing a spurious fundamental weakness. A lack of follow-through should allow cuts to end after a final one in May (see UK: GDP Rebounds From Statistical Low).
Meanwhile, in the US, intensifying inflationary pressures significantly exceeded consensus expectations in January, accumulating news potentially worth 1pp in 2026 since the Fed first cut. We now doubt there can be sufficient downside news to offset these hawkish pressures, with the Fed on hold in March. That means we see the next Fed move as a hike in 2026. Annual core inflationary pressures are not outliers in the US, nor is its labour market resilience, so other central banks should struggle to sustain cutting cycles beyond H1 (see US Inflation Ending Cutting Cycle).
Surprises are turning hawkish, with the Philippines defying expectations for a cut by holding. Then, Uruguay’s rates shocked, with a second increase amid inflation expectations drifting. Although hardly a globally prominent central bank, it is striking to see it join Brazil in a hiking cycle when both have typically led the global cycle. They are another hawkish canary warning of a potential policy reversal. Other central banks with less leading tendencies naturally aren’t following suit. Peru unsurprisingly held rates. The RBA and RBNZ are also widely expected to cut next week.
Dovish neutral rate estimates should not provide an anchor to cuts beyond what other data signals. Central bank estimates are vague, evolving and unreliable guides to policy. Resilient labour markets and persistent unit labour cost growth are an inflationary disease destroying the dovish view that policy rates are well above their neutral settings, urging caution. Neutral estimates gradually drift to explain the prevailing regime, which doesn’t prevent a pause in cuts or a return to rate hikes consistent with historical norms (see Neutral Rates Are Shifting Sands).