- FOMC – will US central bank ramp up taper?
- Lira hits yet another low ahead of CBRT
- UK inflation hits 10-year high as pressure mounts on BoE
Arguably the biggest macro event of the month is finally here as the Federal Reserve delivers its much-anticipated policy decision later today. Expect to see lots of fireworks. This will be the start of major central bank meetings bonanza, ahead of the likes BoE, ECB and CBRT on Thursday. So, there is a very good chance we might see a final spike in volatility in the next few days, before things potentially calm down as we approach Christmas holidays.
All eyes on FOMC
The FOMC simply cannot justify not tapering QE with consumer inflation at its highest since the early 80s, producer prices racing to an all-time high, GDP already above pre-pandemic levels and the labour market being tight. So much for those “transitory” inflation calls. I would even argue now might be a good time to raise interest rates, but that’s very unlikely to happen and Powell dare not scare the market by slamming on the brakes. Yes, omicron means uncertainty is elevated, but in the event the new covid variant doesn’t cause meaningful damage to the economy, keeping asset purchases unchanged might exacerbate inflationary pressures further. So, the risk of doing nothing is greater than accelerating the withdrawal of monetary stimulus. In line with market expectations, I think asset purchases will be tapered by $30 billion a month and purchases will be wrapped up by March. What we don’t know is how many rate hikes will the FOMC project for 2022. Currently, expectations centre around 2 hikes. But if the FOMC’s dot plots point to a more aggressive tightening cycle then that would really surprise the markets. If so, we could see further falls for equities, especially growth stocks in the technology sector, and the dollar’s uptrend could accelerate. Otherwise, we may only see a more modest reaction.
USD/TRY: Lira hits fresh low ahead of CBRT
The USD/TRY has closed in on the 15.00 handle, as the lira slumped to a fresh record low this morning. The latest moves come ahead of the Fed and CBRT policy decisions – two central banks going in the opposite direction, one willingly, even if reluctantly; the other forcefully. No prizes for guessing which one is which.
BoE hike expectations grow as CPI races to 10-year high
- November CPI +5.1% vs +4.7% y/y expected and 4.2% - highest since September 2011
- Core CPI +4.0% vs +3.7% y/y expected and 3.4% last
This morning’s UK inflation numbers were very hot indeed, with CPI breaking the 5% barrier to rise to its highest level since September 2011. Although the pound didn’t react much, the pressure has grown on the Bank of England to increase interest rates at its meeting tomorrow. The probability of a rate hike rose to over 60% from below 50% chance, according to rate futures. Given the uncertainty over Omicron, it is still 50-50 which means whatever they decide will likely move the pound sharply as one group of market participants will be disappointed. However, a 15 basis point hike is not going to stall the economy and there is the issue of credibility. After having already upset the markets last time with their inaction, the MPC may have to hike this time around.
Source for all charts: ThinkMarkets and TradingView.com
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