Seeing that inflation is hot, futures traders believe that the world’s major central banks will tighten more aggressively, and are sharply raising their expectations for the United States,EURForecasts for the end of the cycle of interest rate hikes in the region and the UK.
The terminal interest rate is an important basis for making investment and lending decisions, and it is also the key to determining whether the monetary tightening will end in an economic hard landing or a soft landing.
In the U.S., for example, federal funds futures markets are pricing in bets that the Federal Reserve will raise interest rates by more than 300 basis points (3 percentage points) in total, bringing rates to about 3.9 percent by mid-2023, Archyde.com reported. The forecast is well above the 3% estimate earlier this month.
In Europe, although the European Central Bank (ECB) has yet to raise interest rates,EURAfter the district announced that inflation rose faster than market expectations in May, money markets are betting that the ECB will raise rates by about 290 basis points in this cycle of rate hikes, rising to about 2.4% by 2023. In early June, markets were betting that the ECB would not eventually raise rates to 1.5% until early 2024.
As for the UK, traders now forecast that the Bank of England (BOE) will raise rates by a total of 260 basis points by August 2023, bringing rates to 3.6%, well above the 2.9% forecast a week ago.
The U.S. consumer price index (CPI) rose last week at an annual rate of 8.6%, the highest in more than 40 years. All of this is in stark contrast to the market’s perception in May, when traders slashed their forecasts for endpoint rates when they thought inflation had peaked and economic growth might be starting to slow.
After the CPI report was released last Friday, Deutsche Bank estimated that the Fed’s interest rate will be raised to 4.125% by mid-2023, and Morgan Stanley said that if the inflation situation looks more like the early 1980s, the futures market will end. Rates are forecast to rise to 4.5-5%.
UBS strategist Rohan Khanna said: “Every problem is caused by inflation, so it has to be solved by inflation. Unless the upward momentum of inflation has cooled significantly, no one can sit back and relax.”
Is it possible that the Fed will increase by 4 yards this week?
Both the Fed and BOE will hold a decision-making meeting on Thursday, Taiwan time. Although the market still expects the Fed to raise interest rates by 2 yards (50 basis points) this week, Jefferies, JPMorgan and Goldman Sachs joined the camp of 3 yards after Barclays took the lead in calling for a possible 3 rate hike last weekend.
And according to Bloomberg, analysts at Standard Chartered even believe that in order to maintain credibility, the Fed is unlikely to jump 4 yards (100 basis points, or 1 percentage point) in one go.
“The Fed is trying to erase the perception that they are behind,” said Steven Englander, global head of G10 FX research at Standard Chartered. “50 basis points was a big jump six months ago, but now, even 75 basis points isn’t worth it.” Aggressive, so maybe the Fed will raise a full percentage point to show resolve.”
Englander still predicts the Fed is most likely to raise rates by 2 yards this week, but the odds of a 4-yard rate hike have risen to 10%.