Key rates may end up higher than expected

Mar 8, 2023
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The week began with the publication of positive economic figures around the world. In the ...

The week began with the publication of positive economic figures around the world. In the UK, the private sector returned to growth in February for the first time in six months. The composite PMI for the eurozone also increased, while the US index finally stabilised after seven months of contraction. In Switzerland, inflation rose more than expected in February. Prices increased by +0.7% over one month, resulting in a rise in the annual base of +3.4%. Unemployment continued to fall in our country (-0.1%), reaching 2.1 per cent in February. The next SNB meeting will be held on 23 March and a further 0.50% rate hike is expected.

But the main highlight of the last few days has, as often, come from the United States. On Tuesday, the Chairman of the Federal Reserve said before the US Congress that interest rates are likely to rise more than expected as the central bank strives to reduce inflation, which remains obstinately well above its 2% target. ‘The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated’ he said before the Senate Banking Committee. Before that, he had stated that ‘although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy’. The latest report on the consumer price index published last month showed that prices increased by 6.4% compared to the previous year in January. Admittedly, this represents a slowdown compared to the record rate of 9.1% last summer, but this remains far too high. At its December meeting, the Fed expected interest rates to rise within a range of 5% to 5.25% this year, but Mr Powell’s comments now suggest that rates may need to rise above this level. The Fed’s benchmark interest rate is currently within a range of 4.5% to 4.75%. Jerome Powell added that Fed members would continue to make decisions during the meetings and although he acknowledged that the FOMC had slowed down the pace of its rate hikes, he did not mention whether future rate hikes would continue at the same pace or not. While the market was making an upcoming rate hike of a quarter-point, the base scenario is now expecting an increase of half a per cent.

After this newly hawkish statement by Mr Powell, global stock markets swung into the red and the dollar strengthened sharply. The euro-dollar lost 100 basis points between the beginning of the speech and the end of the day. The pound sterling fell sharply to well below the 1.19 threshold. WTI crude oil prices fell 4%, the worst performer in the day in 2 months. The price of gas also fell sharply: the TTT, the European reference listed in Amsterdam, reached its lowest level since August 2021. On Wednesday morning, it traded just above $50 against $350 (seven times more!) at its summit last summer. Precious metals also declined in the face of the strength of the greenback. While the ounce of gold was worth $1,950 in early February, it was worth only $1,813 on Wednesday morning. On the bond market, the US two-year debt rate surged and fell above 5% to its highest level since 2007. The US ten-year loan rate also tightened by temporarily returning above 4%. But the spread between the 2-year and 10-year rates nevertheless widened. The reversal of the yield curve is a phenomenon that is often considered a herald of economic recession.