Friday Forward Guidance ...
This is our Friday Forward Guidance for Friday 2nd 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.
In latest central bank moves, the Bank of England’s Monetary Policy Committee (MPC) voted 6 to 3 in favour of maintaining the base rate at 5.25% for the fourth consecutive month. Governor Bailey warned rates would stay at high levels into 2024 but the next move is likely to be down.
The US central bank - the Federal Reserve opted to maintain its target range for the federal fund rate at 5.25% to 5.50%. "It's far too early to declare victory and there are certainly risks still facing the economy", Jerome H. Powell, the Fed chair, said. However the Fed Chair gave a clear indication the next move could be down but not in March as the markets seemed to believe.
Meanwhile, the Governing Council of the European Central Bank (ECB) held its three key interest rates at 4.00%, 4.50% and 4.75% in January. Christine Lagarde waved off hopes of early rate cuts from the ECB bit appeared to suggest peak rates had been hit ...
In latest central bank moves, the Bank of England’s Monetary Policy Committee (MPC) voted 6 to 3 in favour of maintaining the base rate at 5.25% for the fourth consecutive month. Governor Bailey warned rates would stay at high levels into 2024 but the next move is likely to be down.
The US central bank - the Federal Reserve opted to maintain its target range for the federal fund rate at 5.25% to 5.50%. "It's far too early to declare victory and there are certainly risks still facing the economy", Jerome H. Powell, the Fed chair, said. However the Fed Chair gave a clear indication the next move could be down but not in March as the markets seemed to believe.
Meanwhile, the Governing Council of the European Central Bank (ECB) held its three key interest rates at 4.00%, 4.50% and 4.75% in January. Christine Lagarde waved off hopes of early rate cuts from the ECB bit appeared to suggest peak rates had been hit ...
Fed Funds Rate ...
In the latest move, the January meeting, the Federal Reserve held interest rates unchanged. The target range for the Fed Funds Rate was maintained at 5.25% and 5.5%. The formal statement issued by the FOMC was cautious and guarded.
"The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals."
Inflation CPI edged back down to 3.1% in January from 3.4% in November. The underlying rate excluding food and inflation was 3.9%. Producer price inflation eased to 0.9% from 1.0%.
Growth in the U.S. accelerated to 3.1% in the fourth quarter. The US economy is in better shape than economists had expected. A strong labor market, sturdy consumer spending and now easing inflation have fueled hopes that the US will avoid a downturn. The Fed staff is no longer forecasting a recession this year.
The Fed December outlook, forecasts growth of 2.6% in 2023 easing to 1.4% in 2024, then rising to 1.8% and 1.9% in the subsequent two years, We model growth at 2.5% in 2023, 2024, and 2025.
We continue to model U.S. base rates peaking at 5.25% in 2023 moving to 4.50% in late 2024. The Fed Blue Dot forecasts suggest the Long Run average rate in the U.S is now 2.50%. Our model rate is around the 4.00% -4.50% level. Ten Year Bonds trade at just over 4.0% this morning,
In the latest move, the January meeting, the Federal Reserve held interest rates unchanged. The target range for the Fed Funds Rate was maintained at 5.25% and 5.5%. The formal statement issued by the FOMC was cautious and guarded.
"The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals."
Inflation CPI edged back down to 3.1% in January from 3.4% in November. The underlying rate excluding food and inflation was 3.9%. Producer price inflation eased to 0.9% from 1.0%.
Growth in the U.S. accelerated to 3.1% in the fourth quarter. The US economy is in better shape than economists had expected. A strong labor market, sturdy consumer spending and now easing inflation have fueled hopes that the US will avoid a downturn. The Fed staff is no longer forecasting a recession this year.
The Fed December outlook, forecasts growth of 2.6% in 2023 easing to 1.4% in 2024, then rising to 1.8% and 1.9% in the subsequent two years, We model growth at 2.5% in 2023, 2024, and 2025.
We continue to model U.S. base rates peaking at 5.25% in 2023 moving to 4.50% in late 2024. The Fed Blue Dot forecasts suggest the Long Run average rate in the U.S is now 2.50%. Our model rate is around the 4.00% -4.50% level. Ten Year Bonds trade at just over 4.0% this morning,
Bank Base Rate...
Inflation, CPI held at 4.0% in January from 4.0% in December. Core inflation, held at 5.1%. Food inflation eased to 7.0% from 8.0%. Energy costs dropped to -18.2% from -21.5%. Service sector inflation eased up to 6.5% from 6.4%. Goods inflation dropped to 1.8% from 1.9% .
Producer Prices are moving in the right direction. Input prices were at -4.3 % in January from -2.2% in December. Output prices moved to -0.6% from 1.0% prior month.
Headline consumer price inflation will average 4.2% in the final quarter of 2023 and 3.5% in 2024 . CPI inflation is expected to return to the 2% target by "the end of" 2025 .
The GDP monthly estimate for December 2023 revealed Real Gross Domestic Product (GDP) is estimated to have fallen by 0.3% in the three months to December 2023, compared with the three months to September 2023.
For the year as a whole, the UK economy is expected to have increased by 0.5% in 2023, compared to prior year. In the first half of the year, GDP increased by 0.6% in Q1 and Q2. Growth then slowed to 0.5% in the third quarter, then fell in the final quarter of the year by -0.3%.
At the latest MPC meeting this week, the committee voted by 6 votes to three, to hold base rate at 5.25%. So much for group think, of which the Bank is oft criticized, two members voted for a rate hike and one voted for a rate cut.
Swati Dhingra, voted in favour of a 0.25-percentage-point reduction to the base rate, marking the first vote for monetary easing in almost three years. Dhingra thinks the Bank is at risk of over-tightening if it waits for data showing sharp declines in wage growth.
Jonathan Haskel and Catherine Mann, on the other hand, voted for another rate rise to 5.5 per cent. They think that wages (rising by 6.5%) are still dangerously high. A majority of six MPC members, including Andrew Bailey, the governor, and Huw Pill, the chief economist, voted for another month of no change.
Andrew Bailey delivered a mixed message to the markets, pointing out that the MPC was "not at the point where we can lower rates'. Nevertheless, he said, the main question facing rate setters at future meetings was 'how long we need to maintain this position". This is a significant change in stance.
The MPC has removed its previous guidance relating to the need for more rate rises, suggesting that the Bank's next move would be a reduction in borrowing costs. Governor Bailey hinted at a potential rate cut, markets assume in June. This would mark the first easing of monetary policy since 2020. Andrew Bailey said, "The economy is "moving in the right direction", possibly towards a position that could cause the Bank of England to consider cutting interest rates.
So what can we make of it all? Our overall forward guidance outlook remains unchanged. We expect a series of three base rate cuts in the current year possibly beginning, in May or June. We model base rates at 4.5% in the final quarter.
* Long Term Note : 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 gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5%.
Inflation, CPI held at 4.0% in January from 4.0% in December. Core inflation, held at 5.1%. Food inflation eased to 7.0% from 8.0%. Energy costs dropped to -18.2% from -21.5%. Service sector inflation eased up to 6.5% from 6.4%. Goods inflation dropped to 1.8% from 1.9% .
Producer Prices are moving in the right direction. Input prices were at -4.3 % in January from -2.2% in December. Output prices moved to -0.6% from 1.0% prior month.
Headline consumer price inflation will average 4.2% in the final quarter of 2023 and 3.5% in 2024 . CPI inflation is expected to return to the 2% target by "the end of" 2025 .
The GDP monthly estimate for December 2023 revealed Real Gross Domestic Product (GDP) is estimated to have fallen by 0.3% in the three months to December 2023, compared with the three months to September 2023.
For the year as a whole, the UK economy is expected to have increased by 0.5% in 2023, compared to prior year. In the first half of the year, GDP increased by 0.6% in Q1 and Q2. Growth then slowed to 0.5% in the third quarter, then fell in the final quarter of the year by -0.3%.
At the latest MPC meeting this week, the committee voted by 6 votes to three, to hold base rate at 5.25%. So much for group think, of which the Bank is oft criticized, two members voted for a rate hike and one voted for a rate cut.
Swati Dhingra, voted in favour of a 0.25-percentage-point reduction to the base rate, marking the first vote for monetary easing in almost three years. Dhingra thinks the Bank is at risk of over-tightening if it waits for data showing sharp declines in wage growth.
Jonathan Haskel and Catherine Mann, on the other hand, voted for another rate rise to 5.5 per cent. They think that wages (rising by 6.5%) are still dangerously high. A majority of six MPC members, including Andrew Bailey, the governor, and Huw Pill, the chief economist, voted for another month of no change.
Andrew Bailey delivered a mixed message to the markets, pointing out that the MPC was "not at the point where we can lower rates'. Nevertheless, he said, the main question facing rate setters at future meetings was 'how long we need to maintain this position". This is a significant change in stance.
The MPC has removed its previous guidance relating to the need for more rate rises, suggesting that the Bank's next move would be a reduction in borrowing costs. Governor Bailey hinted at a potential rate cut, markets assume in June. This would mark the first easing of monetary policy since 2020. Andrew Bailey said, "The economy is "moving in the right direction", possibly towards a position that could cause the Bank of England to consider cutting interest rates.
So what can we make of it all? Our overall forward guidance outlook remains unchanged. We expect a series of three base rate cuts in the current year possibly beginning, in May or June. We model base rates at 4.5% in the final quarter.
* Long Term Note : 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 gilt yields averaged 4.50%, real GDP growth averaged 2.5%, earnings averaged 3.5%, the unemployment rate averaged 5%.
Euro Base Rate...
EU annual inflation eased to 3.1% in January, from 3.4% in December, according to latest data from Eurostat, the statistical office of the European Union.
Official figures showed that inflation in the Eurozone moved up to 2.6 per cent in February from 2.8 per cent in January. Inflation is expected to have averaged 5.6% in 2023, before dropping to 2.9% in 2024 and 2.2% in 2025 according to projections from ECB staff.
At the January meeting, the Governing Council decided to keep the three key ECB interest rates unchanged. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively.
The Governing Council today decided to keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook. Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions. Tight financing conditions are dampening demand, and this is helping to push down inflation.
The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.
The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.
Christine Lagarde gave the clearest indications yet, that interest rates would be on hold in the first half of the year but cuts could be possible in the second half of the year.
We have said " We expect rates (main refinancing operations) to peak at 4.50%. We expect the first rate cut by the end of the second quarter 2024.
EU annual inflation eased to 3.1% in January, from 3.4% in December, according to latest data from Eurostat, the statistical office of the European Union.
Official figures showed that inflation in the Eurozone moved up to 2.6 per cent in February from 2.8 per cent in January. Inflation is expected to have averaged 5.6% in 2023, before dropping to 2.9% in 2024 and 2.2% in 2025 according to projections from ECB staff.
At the January meeting, the Governing Council decided to keep the three key ECB interest rates unchanged. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.50%, 4.75% and 4.00% respectively.
The Governing Council today decided to keep the three key ECB interest rates unchanged. The incoming information has broadly confirmed its previous assessment of the medium-term inflation outlook. Aside from an energy-related upward base effect on headline inflation, the declining trend in underlying inflation has continued, and the past interest rate increases keep being transmitted forcefully into financing conditions. Tight financing conditions are dampening demand, and this is helping to push down inflation.
The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. Based on its current assessment, the Governing Council considers that the key ECB interest rates are at levels that, maintained for a sufficiently long duration, will make a substantial contribution to this goal. The Governing Council’s future decisions will ensure that its policy rates will be set at sufficiently restrictive levels for as long as necessary.
The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction. In particular, the Governing Council’s interest rate decisions will be based on its assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation and the strength of monetary policy transmission.
Christine Lagarde gave the clearest indications yet, that interest rates would be on hold in the first half of the year but cuts could be possible in the second half of the year.
We have said " We expect rates (main refinancing operations) to peak at 4.50%. We expect the first rate cut by the end of the second quarter 2024.
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%.
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%.
That's all for this week ... "to understand the markets you have to understand the economics" and we do ...
© 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
© 2024 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.