Markets Await Fed Rate Decision

Markets Await Fed Rate Hike Decision

At 19:00 this evening, the FOMC are widely poised to conduct a 25bpt rate hike which if realised would bring the base rate from 4.5% to 4.75% - its highest level since 2007. In December, the Fed met market expectations by raising the base interest rate 50bpts from 4% to 4.5%. This sent interest rates to their highest level since October 2007 and follows four consecutive 75bpt rate hikes as the Fed grappled with inflation hitting levels not seen in over four decades.

Shortly after December's FOMC, Powell sent hawkish shockwaves throughout the markets after indicating that the Fed may need to take more aggressive action vis-à-vis monetary tightening. Indeed, Powell stated that the Fed would need “substantially more evidence” to demonstrate that inflation was falling across the board before any reversals. As such, the Fed invited markets to readjust their expectations on the upside as the central bank expected the terminal federal funds rate to hit somewhere between 5.1% and 5.25%.

Nevertheless, the interim six weeks chiefly saw US wage growth come in below expectations, meaning that notwithstanding the tight labour market, some of the inflationary heat caused by it is starting to subside.

As such, last month we saw the level of inflation recorded in December drop 0.6 percentage points from November’s print of 7.1%. This means the latest CPI print is now a sizable way down from June’s highs of 9.1% and was in fact the smallest 12-month increase since the period ending in October 2021. Meanwhile on a month-on-month basis, headline CPI (which includes food and energy) actually fell 0.2 percentage points from 0.1% to -0.1%.

Subsequently, falling inflation meant that markets gained greater confidence that the Fed will opt for a less aggressive 25bpt rate hike today, with money markets now expecting the terminal rate to hit 4.9%.

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IMF Upwardly Revise Global Growth

As we looked at yesterday, the IMF’s latest forecast indicated that the UK will be the only major economy to shrink this year, with growth behind even that of Russia’s. However, looking at global growth more generally, the fund upwardly revised growth expectations from 2.7% to 2.9%. Here, the IMF citied China’s recent reopening “[paving] the way for a faster-than-expected recovery” and better than expected growth in the US, Eurozone and some emerging markets. Nevertheless, the IFM warned that “the balance of risks remains tilted to the downside” given the ongoing conflict in Ukraine, tightening monetary conditions and persistent Covid concerns.

Regarding global inflation, the IMF predicted that it “is expected to fall from 8.8 percent in 2022 to 6.6 percent in 2023 and 4.3 percent in 2024, still above pre-pandemic (2017–19) levels of about 3.5 percent”.

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Eurozone HICP

At 10:00 this morning, markets will be paying close attention to Eurozone HICP Headline inflation for January, where the general consensus is expecting to see a print of 9% on an annualised basis. If realised this would be a 0.2 percentage point decrease from December’s 9.2% print. Today’s print follows the Spanish inflation print on Monday which saw core inflation hit its highest level since 1986. Thus, as we looked at on Monday despite inflation dropping in countries such as Germany (8.05% down from 10.35%), Denmark (8.7% down from 8.9%)??and France (5.9% down from 6.2%), Monday’s data from Spain serves as a reminder of how inflation is continuing to rise in some of the peripheral eurozone member states causing an ever-increasing headache for Frankfurt.

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Also Today

ADP Employment Figures for January are expected to come in at 170,000 new jobs, a considerable move from December’s print of 235,000. Following this, at 15:00 this afternoon US ISM Manufacturing PMI for January is expected to come in at 48pts – indicating a slight contraction. The UK economy is also embroiled in yet more strikes, with today’s involving an estimated 475,000 union members.