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| | Hi Friend,
At the October meeting, the
ECB 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 remained
unchanged at 4.50%, 4.75% and 4.00% respectively.
According to the policy statement, "The latest information broadly confirmed the previous
assessment of the medium-term inflation outlook. Inflation is still
expected to stay too high for too long, and domestic price pressures
remain strong. At the same time, inflation dropped markedly in
September and most measures of
underlying inflation have continued to ease. The Governing Councilās
past interest rate increases continue to be transmitted into
financing conditions. This is increasingly dampening demand and thereby
helps 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 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 Councilās interest
rate decisions will be based on its assessment of the inflation outlook
in light of the incoming economic and financial data."
Official figures showed inflation in the Eurozone eased to 4.3 per cent in September from 5.2 per cent in August.
Inflation is expected to average 5.6% in 2023, before dropping to 2.9%
in 2024 and 2.2% in 2025 according to projections from ECB staff.
EU annual inflation eased to 4.9%
in September, down from 5.9% in August, according to latest data from
Eurostat, the statistical office of the European Union. The IMF latest forecasts assume growth of 0.7% in 2023 rising to 1.2% in 2024.
So trick or treat? The hold on rates is in line with our expectations. Rates may be on hold for longer as inflation trends unwind.
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| | Fed On The Fence ...
The Fed is more agnostic. In their
discussion of monetary policy for the September meeting, members agreed
that economic activity had been expanding at a solid pace, the wording
changed from "moderate" to "solid." They also concurred job gains
had slowed in recent months but remained strong, and the unemployment
rate had remained low. Inflation had remained elevated.
A
majority of participants judged that one more increase in the target
federal funds rate at a future meeting would likely be appropriate,
while some judged it likely that no further increases would be
warranted.
Now it would appear the Federal Reserve is virtually certain to keep rates on hold at the meeting on November 1st. Thatās according to recent statements from Fed policymakers and the
expectations of fixed income markets.
According to the CME FedWatch Tool markets attach a 98.6% probability to the rates on hold event, this despite strong economic data in growth and jobs.
Latest growth data for the U.S.A. suggests the economy expanded by 2.7% year on year in the third quarter. Forecasts for the year as a whole will be upgraded to 2.4% for the year, an upward revision from the latest IMF estimate of 2.1%.
The job market continues to run hot. Inflation is steadying. Core PCE inflation in September was 3.4%. in the month and for the third quarter of the year as a whole.
A hold on rates may bring some stability to bond markets. Ten year yields were trading at 4.3% prior to the Fed September meeting. At close this weekend, rates had risen to 4.9%. Thirty year rates were trading at 5.0% up from 4.4%.
Are the bond market vigilantes saddling up?, the theme of our special edition this month Don't miss that. We had expected one further rate rise next week. Now this seems unlikely. Rates on hold trick or treat, more trickery than treat. Rates on hold to steady the bond markets. There will be further rate hikes ahead, to steady growth, wage increases and inflation.
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| | MPC In The Middle ...
The MPC meets on Thursday this week. We had expected a further rate rise of 25 basis points but "rates on hold" is now the more likely outcome, or so it would appear. Speaking in Marrakech earlier this month, Andrew Bailey said āOur last meeting was such a tight one and
as my colleague Huw Pill has said, theyāre going to go on being
tight ones,ā he told the Institute of International Finance annual
membership meeting.
At its meeting ending on 20
September 2023, the MPC voted by a majority of 5ā4 to maintain Bank Rate
at 5.25%. Four members preferred to increase Bank Rate by 0.25
percentage points, to 5.5%. Five voted for rates to remain on hold.
Inflation remains "sticky", CPI held at 6.7% in September
unchanged from 6.7% in August. Core inflation, eased to 6.1% from 6.2%.
Food inflation has eased to 12.3%. Energy costs eased to 5.0% from 23.3%
in June. Service sector inflation increased to 6.9% from 6.8%. Goods
inflation eased to to 6.2% from 6.3%.
Producer Prices are moving in the
right direction. Input prices were at -4.5 % in September. Output prices
moved to -0.1% from -0.4% prior month. We expect input and output
prices to be negative in Q3 and Q4. Markets expect headline inflation to fall below 5% in the final quarter.
Markets and the MPC have been spooked by
the latest data on earnings. Earnings increased by 8.1% in August. Public sector pay increased
by 12.5%. Private sector pay increased by 7.1%.
Earnings at such inflated levels are not compatible with an inflation target of 2%. Neither are they compatible with base rates on hold at just over 5%. Ten year gilt rates closed at 4.6% this weekend from 4.5% at the end of September. The UK bond vigilantes not saddling up, just "walking and chewing gum" as the MPC is stuck in the middle between policy makers in Europe and the U.S.
So rates on hold trick or treat? We'll have to keep watching the data on that one ...
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| That's all for last week! Have a great week ahead ...
John
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| To understand the markets, you have to understand the economics ...
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Ā© 2023 John Ashcroft, Economics, Strategy and Financial Markets, experience worth sharing.
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