Markets are weighing on comments from the Bank of England’s Monetary Policy Committee Member Catherine Mann who suggested that sterling could weaken further if markets have not sufficiently priced in the prospect of a hawkish Federal Reserve and European Central Bank.
While Mann’s assessment on this specific issue was descriptive rather than normative, she indicated that “there has been a quite a [sic] hawkish tone coming from the Federal Reserve and ECB”, suggesting perhaps that markets have downplayed policy marker’s hawkish tones. Hence, as investors navigate expectations over the Fed’s rate hike course, she stated that “if Fed hawkishness is not priced in, the pound could fall further” as investors seek higher rates of interest.
Mann’s comments came hours before the Fed Chair Jerome Powell told the Senate Banking Committee that the market may need to upwardly revise the Fed’s rate hike expectations, given a flurry of recent inflationary data coming in higher-than-expected. Here, Powell stated that “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.” Therefore, given that these comments follow the Fed conducting a less aggressive 25bpt rate hike in February, markets weighed on the prospect of the central bank’s proclivity to instead opt for a more aggressive 50bpt hike moving forward – as they did in May and December of 2022 (which came alongside 75bpt hikes in June, July, September and November). Hence, as investors digested Powell’s hawkish comments, the dollar rallied with the DXY rising some 1.25% in the subsequent few hours after his testimony. Trading this morning saw the DXY rise to 105.8 hitting three-month highs.
The upside dollar moves thus suggested that investors had not priced in the extent of the Fed’s hawkishness, as Mann had posited. Indeed, according to CME’s FedWatch tool markets are forecasting a 70% chance of a 50bpt hike, up from 30% just a few days prior to Powell’s comments. Money markets are also pricing in a terminal rate of 5.65% to be realised around September.
Mann, who joined the MPC in September 2021, is generally considered to be amongst the BoE’s most hawkish member and has often called for a front-loaded strategy where the central bank raises rates more aggressively at the start of their hiking cycles with the intention of conducting smaller ones down the line. Indeed, Mann was the only member to vote for 75bpts on 15th December 2022 (where the consensus opted instead for 50bpts). Hence, given the Bank of England’s smaller more incremental rate hikes and persistent ‘sticky’ inflation, Mann implied that the terminal rate is “beyond the forecast horizon”.
Money markets have currently priced in a terminal rate of 4.7% as the base rate currently stands at 4%, though markets remain cautious over whether the BoE will raise rates 25bpts (given MPC members Swati Dhingra and Silvana Tenreyro’s dovish tendencies).
Hence, all eyes are now on the respective interest rate decisions from the Fed on the 22nd March and the BoE’s the following day.
As investors upwardly revised their rate hike expectations from the Fed, the US two-year yield (which is sensitive to short term hike expectations) has risen 1.26% in the last 24-hour session. This now puts the 2-year yield above 5% – breaching the previous November highs – which now represents the highest since 2007. This comes as the two year saw highest monthly rise since 1981 over February as it rose 70bpts. The US 10-year yield has also risen to 4%, up 24bpts in the last 24 hours, as investors weigh on rates being higher for longer.
Yesterday saw further pressure on equities as investors continue to digest the prospect of a hawkish fed which has seen the market upwardly revise a terminal rate of around 5.6%. As such the S&P 500 ended yesterday 1.53% lower while the tech heavy Nasdaq and Dow Jones also lost 1.25% and 1.72% respectively. Across the Atlantic, European shares also ended in the red, with the Stoxx 600 falling 0.8% over the session.
As investors upwardly revised their rate hike expectations from the Fed, the prospect of suppressed demand due to easing growth saw pressure on oil with WTI crude futures falling 3.6% over Tuesday’s session. This comes as markets also digested OPEC’s Secretary-General Haitham Al-Ghais warning over the potential for suppressed demand from Europe and the US. Yesterday’s move indicates that WTI crude futures have fallen a little over 1.24% on the month, and 26.4% on the year, having spiked at around $120dpb last March.
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