Friday Forward Guidance ...
This is our Friday Forward Guidance for Friday 17th March. Every week we update our scenario forecasts for base rates in the U.S., UK and Europe over a three year period. We also include our expectations for inflation, as an input to the central bank reaction function, in the Saturday Economist updates.
Last month the Fed hiked by 25 points, the ECB and the Bank of England increased base rates by 50 basis points. More to come? Of course, the ECB promised a further half point rise in March and delivered. More from the Fed and the old Lady too. Where Are Rates Headed? Bet on Higher for Longer —Here and Everywhere … prices and labour costs are weighing on central bankers in the U.S. and the U.K despite fears of instability in the banking sector
U.S. ten year bond yields are trading at 3.53 this morning down from 3.85 last week. UK ten year gilt yields are trading at 3.37 down from 3.70. The US curve is inverted. Two year U.S. treasuries trade at 4.13 (4.82), UK two years offer 3.72 up from (3.69).
In the US, 30 year rates trade below the 4% level, trading at 3.81 (3.96). UK 30 year rates are at 3.32 from 3.51.
Oil trades at $75.68 ($81.07) Brent Crude. Gold trades at $1,951 ($1,835). Sterling trades against the Dollar at $1.2135 ($1.1984), up against the Euro at €1.1410 (€1.1320). The Euro Dollar Cross rate is $1.0635 ($1.0586) ...
Last month the Fed hiked by 25 points, the ECB and the Bank of England increased base rates by 50 basis points. More to come? Of course, the ECB promised a further half point rise in March and delivered. More from the Fed and the old Lady too. Where Are Rates Headed? Bet on Higher for Longer —Here and Everywhere … prices and labour costs are weighing on central bankers in the U.S. and the U.K despite fears of instability in the banking sector
U.S. ten year bond yields are trading at 3.53 this morning down from 3.85 last week. UK ten year gilt yields are trading at 3.37 down from 3.70. The US curve is inverted. Two year U.S. treasuries trade at 4.13 (4.82), UK two years offer 3.72 up from (3.69).
In the US, 30 year rates trade below the 4% level, trading at 3.81 (3.96). UK 30 year rates are at 3.32 from 3.51.
Oil trades at $75.68 ($81.07) Brent Crude. Gold trades at $1,951 ($1,835). Sterling trades against the Dollar at $1.2135 ($1.1984), up against the Euro at €1.1410 (€1.1320). The Euro Dollar Cross rate is $1.0635 ($1.0586) ...
Fed Funds Rate ...
Inflation CPI eased to 6.0% in February from 6.4% prior month. Producer price inflation eased back to 4.6% from 5.77%. The Fed increased rates by 25 basis points at the February meeting. The target range for the Fed funds rate increased to 4.5% to 4.75%. A further 25 basis point rise is expected later this month.
The median projection for the appropriate level of the federal funds rate is now considered to be just over 5 percent in 2023 easing to 4.6% in 2024.
US Fed signaled more rate rises to come as Powell said “The job is not done”. Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.
In support of these goals, the Committee decided to raise the target range for the federal funds rate by 25 basis points to 4.5 to 4.75 percent. The Committee anticipated that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.
The Fed may have reduced the rate of monetary tightening but a further 25 basis point rise seems probable in March.
We model U.S. base rates peaking at 5% in 2023 closing at 4.50% by the final quarter. The Fed Blue Dot forecasts suggest the Long Run average rate in the U.S is now 2.30% to 3.3%. Our model rate is around the 4% level.
The latest data confirms the economy expanded by 2.1% in 2022. Projections for growth in 2023 are largely unchanged at 1.6%. The rate of growth is slowing. Pressure on the Fed to maintain the rate rise programme will continue, albeit at a slower rate. Fed governor Christopher Waller said this week job markets are still ‘unsustainably hot’ and progress on bringing down inflation may have stalled ...
This is our "We are leaving Planet ZIRP" scenario. Grab a ticket for the flight, don't forget the cancellation insurance. The Fed may yet lose the plot.
Inflation CPI eased to 6.0% in February from 6.4% prior month. Producer price inflation eased back to 4.6% from 5.77%. The Fed increased rates by 25 basis points at the February meeting. The target range for the Fed funds rate increased to 4.5% to 4.75%. A further 25 basis point rise is expected later this month.
The median projection for the appropriate level of the federal funds rate is now considered to be just over 5 percent in 2023 easing to 4.6% in 2024.
US Fed signaled more rate rises to come as Powell said “The job is not done”. Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation has eased somewhat but remains elevated. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.
In support of these goals, the Committee decided to raise the target range for the federal funds rate by 25 basis points to 4.5 to 4.75 percent. The Committee anticipated that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.
The Fed may have reduced the rate of monetary tightening but a further 25 basis point rise seems probable in March.
We model U.S. base rates peaking at 5% in 2023 closing at 4.50% by the final quarter. The Fed Blue Dot forecasts suggest the Long Run average rate in the U.S is now 2.30% to 3.3%. Our model rate is around the 4% level.
The latest data confirms the economy expanded by 2.1% in 2022. Projections for growth in 2023 are largely unchanged at 1.6%. The rate of growth is slowing. Pressure on the Fed to maintain the rate rise programme will continue, albeit at a slower rate. Fed governor Christopher Waller said this week job markets are still ‘unsustainably hot’ and progress on bringing down inflation may have stalled ...
This is our "We are leaving Planet ZIRP" scenario. Grab a ticket for the flight, don't forget the cancellation insurance. The Fed may yet lose the plot.
Bank Base Rate...
Inflation, CPI eased in January to 10.1% from 10.5% in December. Inflation may have peaked in October but inflation remains "sticky"" with food inflation running at over 16%. The weakness of oil prices may ease the task but sterling weakness will diminish the softer price impact in £ terms. We expect Brent Crude prices to average $90 dollars over the first three month period of the New Year.
The Bank of England raised interest rates to a 15-year high of 4 per cent. At its meeting ending on the 1st of February 2023, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.5 percentage points, to 4%. Two members, Swati Dhingra and Silvana Tenreyro voted against the proposition, preferring to maintain Bank Rate at 3.50%
Headline CPI inflation has begun to edge back and is likely to fall sharply over the rest of the year as a result of past movements in energy and other goods prices. However, the labour market remains tight and domestic price and wage pressures have been stronger than expected, suggesting risks of greater persistence in underlying inflation. Food inflation remains stubbornly high.
The MPC’s updated projections showed CPI inflation falling back sharply from its current very elevated level, of 10.5% in December. Annual CPI inflation was expected to fall to around 4% towards the end of this year.
The market-implied path for Bank Rate rose to around 4½% by the middle of this year, down a little since the MPC’s previous meeting. Looking further ahead, the MPC stated it will adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit.
Chief Economist Huw Pill suggested last week, a 25 basis point rise is the probability for the March move. Rates could peak at 4.50% by Easter. We model 4.00% as the long run rate in life after Planet ZIRP but 4.50% may yet be a possibility.
The latest GDP data suggests the UK is not (yet) in recession. The economy will have expanded by 4.1% in 2022 with a clear slow down evident in the final quarter of the year.
The OBR now expects the economy to contract by 0.2% this year, a much more optimistic outlook than was the case in November last year. NIESR are now forecasting growth of 0.2% this year. The U.K. will narrowly avoid recession is the suggestion.
We expect rates to peak at 4.5% or possibly 4.75% this year before easing back to around 4% into 2024 ...
Inflation, CPI eased in January to 10.1% from 10.5% in December. Inflation may have peaked in October but inflation remains "sticky"" with food inflation running at over 16%. The weakness of oil prices may ease the task but sterling weakness will diminish the softer price impact in £ terms. We expect Brent Crude prices to average $90 dollars over the first three month period of the New Year.
The Bank of England raised interest rates to a 15-year high of 4 per cent. At its meeting ending on the 1st of February 2023, the MPC voted by a majority of 7–2 to increase Bank Rate by 0.5 percentage points, to 4%. Two members, Swati Dhingra and Silvana Tenreyro voted against the proposition, preferring to maintain Bank Rate at 3.50%
Headline CPI inflation has begun to edge back and is likely to fall sharply over the rest of the year as a result of past movements in energy and other goods prices. However, the labour market remains tight and domestic price and wage pressures have been stronger than expected, suggesting risks of greater persistence in underlying inflation. Food inflation remains stubbornly high.
The MPC’s updated projections showed CPI inflation falling back sharply from its current very elevated level, of 10.5% in December. Annual CPI inflation was expected to fall to around 4% towards the end of this year.
The market-implied path for Bank Rate rose to around 4½% by the middle of this year, down a little since the MPC’s previous meeting. Looking further ahead, the MPC stated it will adjust Bank Rate as necessary to return inflation to the 2% target sustainably in the medium term, in line with its remit.
Chief Economist Huw Pill suggested last week, a 25 basis point rise is the probability for the March move. Rates could peak at 4.50% by Easter. We model 4.00% as the long run rate in life after Planet ZIRP but 4.50% may yet be a possibility.
The latest GDP data suggests the UK is not (yet) in recession. The economy will have expanded by 4.1% in 2022 with a clear slow down evident in the final quarter of the year.
The OBR now expects the economy to contract by 0.2% this year, a much more optimistic outlook than was the case in November last year. NIESR are now forecasting growth of 0.2% this year. The U.K. will narrowly avoid recession is the suggestion.
We expect rates to peak at 4.5% or possibly 4.75% this year before easing back to around 4% into 2024 ...
Euro Base Rate...
Euro area annual inflation eased to 8.5% in February 2022, down from 8.6% in January and 9.2% in December, according to latest data from Eurostat, the statistical office of the European Union. The Euro area grew by 3.5% in 2022. Growth is now expected to be around 1% in the current year, rising to 1.6% in 2024 and 2025.
At the March meeting, the Governing Council decided to raise the three key ECB interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.50%, 3.75% and 4.00% respectively, with effect from 22 March 2023.
The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target.
Previously we have said, "If our expectations for US and UK rates hold, Euro rates (marginal lending facility basis) could rise to 3.75% in the second quarter and close at that level at the end of 2023. This would still mean Euro rates are lagging U.S. and U.K. rates significantly, suggesting pressure on the Euro will continue, or the ECB will move more aggressively to narrow the rate gap. We expect upward revisions to the European rates outlook are possible despite fears of recession and inflation easing. We now expect rates to peak at 4.25% in the second quarter.
Euro area annual inflation eased to 8.5% in February 2022, down from 8.6% in January and 9.2% in December, according to latest data from Eurostat, the statistical office of the European Union. The Euro area grew by 3.5% in 2022. Growth is now expected to be around 1% in the current year, rising to 1.6% in 2024 and 2025.
At the March meeting, the Governing Council decided to raise the three key ECB interest rates by 50 basis points. Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 3.50%, 3.75% and 4.00% respectively, with effect from 22 March 2023.
The Governing Council will stay the course in raising interest rates significantly at a steady pace and in keeping them at levels that are sufficiently restrictive to ensure a timely return of inflation to its 2% medium-term target.
Previously we have said, "If our expectations for US and UK rates hold, Euro rates (marginal lending facility basis) could rise to 3.75% in the second quarter and close at that level at the end of 2023. This would still mean Euro rates are lagging U.S. and U.K. rates significantly, suggesting pressure on the Euro will continue, or the ECB will move more aggressively to narrow the rate gap. We expect upward revisions to the European rates outlook are possible despite fears of recession and inflation easing. We now expect rates to peak at 4.25% in the second quarter.
Scenario Comparisons ...
This is the table of scenario comparisons. We would expect UK rates to lag not lead the US pattern. EU rates would follow the US/UK lead. Inflation may subside sooner than expected. Central banks may worry about the shock to growth. This is a scenario not the plan.
Our modified Taylor rule suggests the UK central bank is behind the curve on rate hikes. In our modified Taylor rule we model base rates as a function of inflation variance from target and the output gap relative to trend growth.
We model the long run rate at 4.0%. The Fed Blue dot projections assume 3.50% as the perceived long run rate. In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year bond yields averaged 4.50%. Some way to go yet, in the return to normality!
This is the table of scenario comparisons. We would expect UK rates to lag not lead the US pattern. EU rates would follow the US/UK lead. Inflation may subside sooner than expected. Central banks may worry about the shock to growth. This is a scenario not the plan.
Our modified Taylor rule suggests the UK central bank is behind the curve on rate hikes. In our modified Taylor rule we model base rates as a function of inflation variance from target and the output gap relative to trend growth.
We model the long run rate at 4.0%. The Fed Blue dot projections assume 3.50% as the perceived long run rate. In the UK, prior to the Great Financial Crash [2000 - 2008] the average inflation rate was 2.0%, the average UK bank rate was 4.50%. Ten year bond yields averaged 4.50%. Some way to go yet, in the return to normality!
That's all for this week ... "to understand the markets you have to understand the economics" and we do ...
© 2023 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
© 2023 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.