Market Views

GLOBAL CREDIT BULLETS | Monday, 30 January 2023

Fed – Can’t hold the Hawkish line much longer
Despite the recent hawkish tone by Fed officials on the need for a string of further rate hikes, we expect the Fed to raise interest rates by 25bp at their meeting this week.
The Fed’s overarching message will be one of acknowledging a weakening economy while simultaneously pledging to “stay the course” and maintain restrictive policy until inflation is convincingly on its way back to target, guiding toward a 5.25% terminal rate. However, recent macroeconomic data, particularly cooling inflation data, suggest that the rate hiking cycle is approaching its end. To reinforce this, last week, the Bank of Canada was the first DM central bank to signal a pause in its rate hiking cycle.
Overall, we expect a terminal rate closer to 5%. Currently, the market is pricing a 4.9% terminal rate to be reached by June.

BoE – Not the time to slow down
We expect a 50bp hike at their meeting this week. Recent data, including better-than-expected GDP and concerning strength in wage growth, should keep a majority of the MPC favouring such a move.
Reflecting this, we could expect updated projections to show a less pessimistic growth outlook, and increased medium-term inflation, particularly if the projections also embed a higher equilibrium unemployment rate.
That said, we expect another split vote, while the guidance is likely to open the door to a slower pace of hikes ahead. Overall, recent strong macro data presents a headache for the BoE, which is looking to slow down their hiking pace as soon as possible. Following this week’s meeting, we need to see if the labour market can cool sufficiently for them to stop hiking by March. Currently, the market is pricing a 45bp hike for this week and a ~75bp hike in March, and an overall terminal rate of 4.3%.

ECB – Still playing catch-up
Over the past weeks we have been hearing mixed commentary from both dovish and hawkish ECB members calling for 25bp and 50bp hikes, respectively. We expect the ECB to raise interest rates by 50bp this week.
In Europe, December core inflation rose to a new high of 5.2% and we think persistently higher wage growth in the Eurozone of 5-6% will keep core inflation higher for longer. In addition, European economic data is holding up well and business sentiment and surveys are improving. This remains a big problem for the ECB, meaning they’ll stay on course with their hawkish rhetoric, and thereby will likely decouple from the Fed more meaningfully over the next months.
Overall, we think the ECB is likely to continue raising rates, with markets pricing hikes of 50bp and 93bp for the next two meetings, and a terminal rate of 3.3% overall. Finally, we expect some sort of QT guidance, potentially with some technical detail on APP reinvestments, however with limited market impact.

Algebris Investments’ Global Credit Team

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