The FOMC, ECB, BoE, SNB and Norges Bank are out of the way, leaving the markets digesting the tightening announcements as we move to the year’s end.
The SNB, ECB and BoE all delivered a 50 bp rate hike as expected, with the Norges Bank being the exception of the week hiking policy rate by 25 bp. ECB left the deposit rate at 2.00% and the main refi rate at 2.50%. The statement stresses that rates still have to rise significantly at a steady pace, and the ECB will stop the reinvestment of some bonds maturing under the APP program with the APP portfolio set to fall by an average of EUR 15 bln a month in Q2. So QT will start and more rate hikes are to come, as the inflation forecast for 2023 was lifted to 6.3% from 5.5%.
ECB rates to turn restrictive – QT to start. The central bank may have slowed down the pace of tightening moves, but the statement made very clear that this is not a sign that rates are anywhere close to the peak and that there will have to be further “significant” tightening to bring rates to a restrictive level, in order to dampen demand and thus help to bring inflation down. Now the ECB is facing a recession, but still has to tighten policy. At the same time QT will finally start, but initially at a modest pace of EUR 15 bln per month. For markets that means a welcome improvement in the availability of highly liquid assets, but there is the risk of volatility in debt markets as the ECB withdraws support.
Despite this the focus on the extended and significant inflation overshoot means the ECB remains on course to lift policy rates into restrictive territory.
Suprisingly, BoE spooked the markets today despite the fact that they did the expected and hiked bank rate by 50 bp to 3.50% as an expected slowdown in the pace of tightening moves. However this decision was the result of a three way split vote. Two members preferred to hold the Bank Rate at 3% and one preferred a 75 bp rate hike to 3.75%. The wide range of opinions flags heightened uncertainty over the outlook for growth and inflation, with headline CPI coming down, but wage growth continuing to flag pass through effects.
Bank staff now see economic activity contracting -0.2% in the last quarter of the year, but while “labour demand has begun to ease, the labour market remains tight”, according to the statement, which also flagged higher than expected wage growth. Indeed, the BoE noted that “there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and justifies a further forceful monetary policy response”. Against that background “the majority of the Committee judges that, should the economy evolve broadly in line with the November Monetary Policy Report projections, further increases in Bank Rate may be required for a sustainable return of inflation to target”.
There was no overt pushback against market expectations for the final rate, which remain higher than analysts expectations and the statement also flagged the possibility of more persistent inflationary pressures that could require forceful action. So not quite as dovish as the last time around, but the fact that two MPC members opted for stable rates still left Sterling on the backfoot.
Treasuries initially underperformed, after a more hawkish than anticipated message from the Fed on Wednesday, but pared losses in the wake of the BoE announcement. The US Dollar has benefited and the USDIndex has lifted to 104.30, as the Fed doesn’t look less hawkish than the European central banks so far, which has knocked EURUSD and GBPUSD off recent highs.
Metals in the meantime, such as the safe haven Gold, have knocked back by the Fed’s hawkish dot plot that prompted a bounce in the US Dollar as markets revised up their projections for the final rate. Bullion has declined to $1771.60, reverting all gains from US the Inflation release. The US Dollar and Treasury yields are moving higher, which will keep pressure on the precious metal for now.
The daily price position remains above the 200-day EMA, with the RSI at 55 and the MACD signal aligned with the histogram in the buy zone. The divergence bias is clearly visible in the 8-hour chart, but not yet signaling that a decline will take effect, until a confirmed breakout of the rising wedge pattern occurs. Gold could find a floor at the 1771 level (confluence of 20-day SMA and latest daily low fractal).
While bullion has bottomed out the last few hours and looks ready to stabilise, $1800 and $1760 (200-DMA) are still holding as key barriers for Gold’s path. After bottoming at $1614.96 at the end of September, the precious metal is slowly but steadily gaining ground.
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Andria Pichidi
Market Analyst
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