Although the market generally believes that the Fed will only raise interest rates by 25 basis points in early February, such a small rate hike will give the market a sense of security. But this sense of security may be false, because global inflation remains high and the Fed is still expected to increase interest rate hikes.
In the next week or so, before the Fed’s decision, there will be no major changes in the macro market. U.S. yields started last Friday, the 30-year yield curve rose, 12bp higher than the 10-year yield curve, and the yield curve became steeper.
The market is increasingly divided on interest rate cuts in 2023, and Fed officials have firmly stated that they will not cut interest rates soon and will maintain a higher terminal interest rate than the December dot plot.
While the U.S. and European economies have well-documented growing disparities, the 2023 outlook sees growth momentum in the U.S. exceeding expectations, while Europe’s economies are likely to hit record lows.
In Europe, the unemployment rate in the euro zone continued to rise, while the tone of the European Central Bank remained tough. Lagarde was firm in his policy and would continue to raise interest rates to the end. The president of the Austrian central bank pointed out in his recent speech that I think the European Central Bank has reasons to raise interest rates more substantially.
Meanwhile, in the US, market participants continue to price in the possibility of a rate cut in 2023. Among them, the market is concerned about the PMI data of the United States, weak industrial output and capacity utilization, which has increased the expectation of the Federal Reserve to cut interest rates in December.
Still, the U.S. labor market remained strong, with initial jobless claims falling to a 53-year low of 190,000. So market participants are also divided.
Some 75% of fund managers saw zero interest rates in 2012, but not an inflationary cycle. In other words, only 25% of fund managers have ever seen a completed inflation cycle.
The “Fed News Agency” believes that the Fed will raise interest rates by 25 basis points in early February, and the Fed Waller also said that he will support the next resolution to slow down the pace of interest rate hikes. Of course, Fed Chairman Powell also tends to support a 25 basis point rate hike. Against this background, many investors have a sense of security that the Fed is becoming more friendly to the market.
However, the market’s optimism should not be too high, because Fed officials still will not relax their pace of raising interest rates in a short time. Even the most dovish Fed officials. We generally consider Brainard’s views to be the most dovish.
She believes that the data show that the core inflation data will be flattened, and the overall core inflation may still rise. It is also necessary to pay attention to related factors such as the conflict between Russia and Ukraine, the epidemic situation, etc. These uncertainties will make the decline in inflation become less Slower.
European Central Bank President Christine Lagarde pointed out in a recent speech that after the opening of the epidemic in China, it is expected to drive inflation higher, and many of us will face inflationary pressure. China is expected to consume significantly more energy this year than last year, which will push up inflation.