The Fed, ECB and SNB are thinking of slowing down... New Zealand swims against the tideNov 23, 2022
- DOW JONES34’098.10
- WTI CRUDE OIL81.20
After a spectacular appreciation since the beginning of the year, the greenback has taken a sharp fall in recent days against the euro, with the latter trading as high as $1.0481 as reported last Wednesday. Lower-than-expected inflation figures in the US in October accelerated the trend, with markets expecting the Fed to slow its monetary tightening. At least that is what the interest rate futures contracts are showing us at the moment, with a Fed Funds yield of 4.15% for December, compared with 3.80% overnight currently. The hike is therefore only expected to be 0.35%. This view is shared by some members of the Feds who believe that although the hikes will continue next year, they will no longer be 75 basis points. Nevertheless, the fall of the dollar was halted as risk aversion returned to the markets. Safe havens and the greenback have thus recovered. The missiles that hit the vicinity of the Ukrainian nuclear power plant in Zaporizhia have shaken the euro and the dollar is also benefiting from recent events in China. The country has recorded the first COVID-related deaths since May and cases have reached record levels. Officials closed universities in Beijing and the most populous district in the Chinese capital asked residents to stay home for five days. This is a sign that the government is reverting to tighter restrictions on COVID and this is again weighing on the economic outlook. Retails sales in the country contracted by 0.5% compared to a 2.5% increase in the previous month and industrial production also fell. The barrel of crude oil took a beating from the news, plunging to $75.27. This is the lowest since September and close to the lows of the year in early January.
The Swiss franc is moving sideways against the dollar and the euro despite Andréa Maechler’s hawkish comments late last week in Geneva. She said that the SNB is prepared to continue to raise its key interest rates if inflation remains above 2%. At 3.0% in October, down from 3.3% in September, it is admittedly falling back, but it remains well above target. As regards the exchange rate, Ms Maechler confirmed that the strong franc had greatly helped to contain the rise in inflation so that it remained at a much lower level than in the countries around us. A rate hike at the semi-annual meeting on 15 December seems to be a foregone conclusion, but here too the SNB would be prepared to reduce the size of the hike. Currently 0.84% for the December contract, the key rate is therefore only expected to rise by 0.34%. The future rate for March is 1.07% showing that the National Bank should proceed cautiously by raising its money rate by half a percent, probably in two 0.25% steps.
In Europe, too, there is a lively debate within the ECB about the size of the next rate hike. Last Thursday, inflation came out at 10.6% for the month of October compared to 9.9% the previous month. With an increase of 200 basis points since July, the Frankfurt-based ECB has carried out the fastest rise in its history to the current 1.5%. Philip Lane, the ECB’s chief economist, said the central bank was likely to extend its rate hike cycle next year. ‘I don't think December is going to be the last rate hike’, he declared in an interview. ‘But one platform for considering a very large hike, such as 75 basis points [as in September and October], is no longer there’ he added. The ECB has to take into account that the eurozone is expected to go into recession this winter as the latest figures suggest. ‘We currently do think that any recession will be mild and short-lived’, said Mr Lane.
In contrast to the above-mentioned central banks, New Zealand’s central bank did not hesitate and proceeded with a record increase by raising its key rate by 0.75%. The Monetary Policy Committee is convinced that further tightening will be necessary in its fight against inflation, even though it is forecasting a recession for next year. It has therefore raised its official rate from 3.50% to 4.25% and expects it to reach 5.5% in September 2023. This sharp increase follows the announcement that inflation in the third quarter was 7.2% annualised.
Gold benefited from the fall in the dollar to re-establish itself above the $1,700 per ounce mark. The precious metal has so far failed to break through the technical resistance of $1,785 and is consolidating the advance it started at the beginning of the month at $1,617.
Tonight, the minutes of the last FOMC meeting will be published, which should shed light on the Fed’s vision for the future evolution of interest rates. After that, the weekend should be fairly quiet with the Thanksgiving holiday tomorrow in the US leading to a long weekend and reduced activity.