Central Banks Start to Bite the Bullet
Central Banks Start to Bite the Bullet
Last week will go down as the week when central banks finally woke up to the threat of inflation and started to move to try and contain it. The Bank of England was the first to follow on from the hawkish Federal Reserve and raised the cost of borrowing to .5%. Indeed, almost half the Monetary Policy Committee wanted to increase it further, so if things stay as they are, the odds are on a further move upwards in March. The Bank of England’s move was fully anticipated in the markets; however, sterling initially jumped on the thoughts of the further hike next month. The move upwards, particularly against the euro, was short-lived and reversed after Christine Lagarde grudgingly acknowledged that the ECB might also have to tighten policy. The change in tone from the ECB caught the market somewhat on the hop, and traders rushed to cover their short euro positions, causing sterling and the dollar to suffer setbacks.
The week of surprises had one trick left, which was revealed on Friday afternoon when the US Labor Department announced that Non-Farm Payrolls had increased by no less than 467,000. The market had been bracing for a much lower number, possibly a negative number after the White House strongly hinted as much. Unsurprisingly the dollar regained some lost ground and has opened this somewhat steadier. It was not only busy in the money and foreign exchange markets but also in the background the world’s stock markets continued to wobble as investors reassessed their risk appetite. Despite no central bank meetings being scheduled this week, no doubt there will be plenty of their members stepping up to the microphone to explain their actions further. Finally, the trials and tribulations of Boris Johnson look set to continue, with some commentators suggesting he may face a no-confidence vote in the coming days. Mind you, if you think he is having a tough time, just consider Mark Zuckerberg, who lost $25bln in one day as Meta (formerly Facebook ) shares dived!
GBP
The pound again confounded many in the market when it finished the week lower against the euro than it had started despite the upward move in base rate. As we said earlier, the Bank of England is looking likely to move rates higher again in March. This would typically lead to a sterling rallying; however, buried in the footnotes to last week’s Monetary Policy Committee meeting, the Bank states that it expected inflation to drop relatively quickly from its elevated levels. Some took this as meaning that the peak of interest rates will be somewhat lower than anticipated. UK gilts are also pointing in this direction and giving signals that we may well be heading for a recession. This week is a quiet week for data, with the only meaningful release being Gross Domestic Product (GDP) on Friday. As would be expected after the hit to the economy that Omicron delivered in December, the figure is forecast to have fallen by about half a per cent. Huw Pill, the Bank of England chief economist, speaks on Tuesday as Andrew Bailey on Thursday evening. With a dearth of data due, the focus may turn to Boris Johnson’s problems and the mounting tensions with Europe over the Northern Ireland Protocol.
EUR
After its best week of the year, we will be watching to see if the euro can consolidate its gains against sterling and the greenback. After Christine Lagarde and the ECB took a hawkish turn last week, it appears the period of policy divergence between them and their peers, the Bank of England and the Fed, may be coming to a close. The week ahead sees a relatively calm data docket, with the German Consumer Price Index on Friday being the highlight. With Germany’s understandable obsession with inflation, a high number would place further pressure on the ECB and increase the anticipation of a tightening of policy by them sooner rather than later. Christine Lagarde has another opportunity to expand on her change of heart this afternoon when she gives a speech, as do Phillip Lane and Eric De Guindos on Thursday. Politically, Italy seems to have resolved its domestic issues with Sergio Mattarella re-elected whilst President Macron takes to the centre stage in an attempt to get President Putin to back down from invading Ukraine.
USD
With employment showing no ill effects from Omicron, as evidenced in the Non-Farm Payroll numbers on Thursday, one of the Federal Reserve’s mandates looks to be comfortably under control. Indeed, the problem is getting workers to fill jobs with a vacancy rate of 1.7 job vacancies for every unemployed person. This week the latest Consumer Price Index will be released, and investors will get to see whether the rest of their mandate is still running at an uncomfortable rate. A headline rate of 7.3% is forecast which will be the highest rate since 1982 when a young Paul Weller was Number one in the charts with The Jam! With a labour shortage and continuing supply chain problems, it is thought unlikely that this will be the peak in inflation. Consequently, a March rate rise by the Federal reserve looks increasingly likely.
Scandi
The Swedish krona followed and moved in line with the changing risk-on and risk-off sentiment throughout last week. In the end, it finished unchanged against the euro and somewhat stronger against sterling. This week all eyes are on the Riksbank on Thursday as the latest interest rate decision is announced. Although the market is not expecting any change, the press conference following the announcement will be closely watched as market participants look for nuances or even clear, forward guidance from Governor Ingves. Over in Norway, the krone had a relatively uneventful week staying within its narrow range against most G10 currencies. This week, the latest CPI figure is released on Thursday and will likely be closely monitored by (outgoing) Governor Olsen. This will be the last official inflation figure and reading before Former Prime Minister of Norway and Current Chief of NATO, Jens Stoltenberg, picks up the keys to Norges Bank in March.
Email: richard.matthews@gcpartners.co
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