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Investors expecting longer period of high interest.

 Changes in futures mar­kets have shown that investors are start­ing to accept the Fed’s mes­sage that

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cool­ing infla­tion will take more time. Investors are bet­ting on a more extended period of higher interest rates as they begin to get the mes­sage from US Fed­eral Reserve offi­cials that more time is needed to cool infla­tion in the face of a resi­li­ent labour mar­ket. Futures mar­kets show that investors expect rates to peak slightly above 5 per cent in July, with only one interest rate cut by the year-end. As recently as last week, they had been expect­ing a peak of about 5 per cent in May, with two rate cuts by the end of 2023.

The shift came after a block­buster employ­ment report that showed the labour mar­ket surged by half a mil­lion jobs in Janu­ary. Investors have for months been bet­ting that a rapid decel­er­a­tion in infla­tion would allow the Fed to cut interest rates as soon as the fourth quarter of this year, des­pite the insist­ence of cent­ral bank offi­cials that they had no plans to do so. The shift in interest rate expect­a­tions takes investors closer to the Fed’s offi­cial pro­jec­tions that were pub­lished in Decem­ber, although they still under­es­tim­ate the cent­ral bank’s expect­a­tion that it will not cut interest rates until at least 2024. « We’re going to need to main­tain that for a few years to make sure we get infla­tion to 2 per cent».

Although US infla­tion has been trend­ing lower, eco­nom­ists have fore­cast that in Janu­ary, the decline will have mod­er­ated because of recent per­sist­ent price pres­sures in hous­ing and an uptick in the prices of energy and used cars. Tomor­row’s con­sumer price index report from the Bur­eau of Labor Stat­ist­ics is expec­ted to show annual infla­tion at 6.2 per cent in Janu­ary, down from 6.5 per cent the pre­vi­ous month, accord­ing to an eco­nom­ists’ fore­cast com­piled by Bloomberg. High rents will have pre­ven­ted a big­ger drop in core infla­tion, accord­ing to Barclays ana­lysts, in addi­tion to higher prices of used cars. Over the longer term, Barclays ana­lysts said they had revised higher their CPI fore­casts for the end of 2023 and 2024 because of the con­tin­ued strength of the US labour mar­ket.

The Bur­eau of Labor Stat­ist­ics repor­ted recently that the US added more than half a mil­lion jobs in Janu­ary, roughly triple the num­ber that had been fore­cast.

The UK’s Janu­ary infla­tion fig­ures on Wed­nes­day will also be watched closely by investors and by the Bank of Eng­land as it strives to bring infla­tion back to its tar­get of 2 per cent. Eco­nom­ists polled by Reu­ters expect UK annual infla­tion to have slowed to a four-month low of 10.2 per cent. That would mark a decline from 10.5 per cent in Decem­ber. UK infla­tion accel­er­ated last year to a peak in Octo­ber of 11.1 per cent but has slowed since then on the back of lower energy price growth.

Ana­lysts expect aver­age earn­ings growth, exclud­ing bonuses, to have accel­er­ated to 6.5 per cent in Decem­ber, com­pared with 6.4 per cent in the pre­vi­ous month. Strong wage growth and higher infla­tion than expec­ted could call into ques­tion the slow­down in the pace of the mon­et­ary tight­en­ing fore­cast at the next meet­ing on March 23. Mar­kets are pri­cing in a 0.25 per­cent­age point rise after the bank lif­ted rates by 0.5 per­cent­age points earlier this month but sig­nalled that it might soon have fin­ished tight­en­ing.

The release of robust eco­nomic data after the lunar new year hol­i­day has spurred investor con­fid­ence that China’s eco­nomy is recov­er­ing after zero-Covid restric­tions were lif­ted in Decem­ber, with the bench­mark CSI 300 index rising more than 6.25 per cent year to date. Ana­lysts say that robust inflows are likely to con­tinue, with US growth expec­ted to slow and retail investors yet to join the fray. «Flows could still bene­fit the fin­an­cial mar­ket if con­fid­ence returns and house­holds opt for not only ‘revenge spend­ing’, but also ‘revenge risk-tak­ing’,» the ana­lysts said.

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  1. Peter13 February 2023 at 10:51

    It will surely take a good amount of time to get inflation to 2 per cent. It's best to keep expectations in check and not fall for wishful thinking.

    ReplyDelete
  2. Kyle13 February 2023 at 13:21

    Good to see most investors finally getting the message the US Federal Reserve has been putting out for some time. This will take time especially since the labour market is so resilient.

    ReplyDelete

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