It’s a very exciting week. Three decisions by three central banks in the world bring the curtain down on 2022, which recorded major unexpected developments that had a great impact on the global economy, opening the door to one 2023 packed with negative speculation.
Markets are now placing bets on what the Fed, Bank of England (BoE) and the European Central Bank (ECB) will expect at their final meeting of the year.
Since the last meetings in November, risk sentiment has improved significantly, with the US dollar falling to 6-month lows and equities recovering.
Essentially, the main reason was the belief that central banks, led by the Federal Reserve, would begin to ease their tightening policy, as inflation begins to show signs of deflation and as economies are likely to face a global recession in the first half of 2023.
Federal Reserve
The Federal Reserve’s Federal Open Markets Committee will hold its last two-day meeting of the year on December 13 and 14.
The meeting is preceded by a headline inflation report that will determine the committee’s decision.
Federal Reserve Chairman Jerome Powell and his team have been clear over the past few months that their policy decision will depend on data.
The trajectory of equities in the near future may depend on whether Tuesday’s CPI report shows that inflation is responding to the Fed’s most aggressive hike cycle since the eighties. The hotter-than-expected data may reinforce fears of further tightening of the Fed, which will put pressure on stocks.
The Federal Reserve is set to disappoint Wall Street by keeping interest rates at their peak throughout 2023, dashing hopes markets had taken into account for a second-half rate cut that would make a recession highly likely.
October’s nonfarm payrolls report was the first to show weakness in the Fed’s hawkish statements. Despite adding more jobs per month, the unemployment rate jumped to 3.7 percent from 3.5 percent, a bigger increase than markets expected. Then came the October CPI reading, which showed a marked decline in headline and core consumer inflation to 7.7 percent and 6.3 percent accordingly, both well below market estimates.
The US producer price index also fell in October, confirming that prices have been falling since the start of the production line. Sentiment readings such as PMIs also fell.
However, the latest employment data showed more jobs added than expected in November, along with surprisingly strong readings of GDP and personal consumption expenditures, which confused markets about what the Federal Reserve thinks ahead of the meeting.
Policymakers are closely following the wage increase, given concerns that the salary increase will exacerbate inflation-related pressures.
Markets estimate an 80 percent chance of raising interest rates by 50 basis points compared to just 20 percent by 75 basis points.
The Federal Reserve has raised interest rates six times this year, four of them by 0.75 points, bringing the rate to between 3.75 percent and 4 percent.
Read more: Will the Federal Reserve surprise markets on Wednesday?
Bank of England
Economic data in the UK has remained slightly more resilient than in the US since the previous central bank meeting. Both the CPI and the PPI continued to rise, with consumer inflation reaching a 41-year high of 11.1 percent.
This level is expected to be the peak, with November CPI estimates – to be released on December 14 – showing a decline to 10.7 percent.
That is unlikely to affect the magnitude of December’s rate hike — which will be the next day — as markets put a sure chance of a 50 basis point rise on Thursday.
European Central Bank
Recent comments from ECB officials will not lead to the belief that a slowdown is imminent but market participants are still tilted to a smaller rally, with 50 basis points pricing, following the 75 basis point hikes in September and October.
The messages at this meeting are likely to remain hawkish, which will give the bank’s board the ability to adjust rates accordingly at their upcoming meetings.
For more, go to Economy Middle East Markets.
