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☆ Central banks look to have hit peak rates. Here's how markets think they'll come down
▼ + stars: | 2023-11-07 | by ( Elliot Smith | ) www.cnbc.com time to read: +6 min

The U.S. Federal Reserve, European Central Bank and the Bank of England dramatically hiked rates over the last 18 months in a bid to tame runaway inflation. Reid also highlighted that this is the seventh time this cycle that markets have notably reacted on dovish speculation. "Clearly rates aren't going to keep going up forever, but on the previous 6 occasions we saw hopes for near-term rate cuts dashed every time. In clear, waiting for inflation to reach 2% before cutting rates would be 'overkill,'" Moëc said. However, minutes from last week's meeting reiterated the Monetary Policy Committee's expectations that rates will need to stay higher for longer, with U.K. CPI holding steady at 6.7% in September.

Persons: Jerome Powell, Brendan McDermid, nonfarm payrolls, DBRS Morningstar, Jim Reid chalked, Reid, we've, Gilles Moëc, Moëc, Christine Lagarde, Yannis Stournaras Organizations: Federal Reserve, New York Stock Exchange, U.S . Federal Reserve, European Central Bank, Bank of, Fed, PCE, DBRS, Deutsche Bank, ECB, AXA, National Bank of Greece, of, Bank of England, CPI, BNP Locations: New York City, Bank of England, U.S, Europe

Yet increasingly, euro area specific factors, particularly exposure to higher oil prices, risk further weakness in an already stagnating economy, and the single currency. The euro is especially vulnerable to rising oil prices, with net imports accounting for over 90% of oil products available in the European Union. "High oil prices are weighing on the euro area's terms of trade, and if oil prices move above $100 per barrel to $110 per barrel we think it will be difficult for the euro to avoid parity," said Nomura's G10 FX strategist Jordan Rochester. But it also lifts price pressures through higher import costs, compounding the impact from higher oil prices. "Definitely the euro zone is not in a good place right now," said Moec, adding that he did not rule out a euro move to parity.

Persons: Dado Ruvic, Jordan, Nomura, Morgan Stanley, Jens Eisenschmidt, Francesco Pesole, Athanasios, Gilles Moec, Dhara Ranasinghe, Alun John, Yoruk, Christina Fincher Organizations: U.S, REUTERS, European Union, OPEC, Barclays, European Central Bank, ECB, ING, Germany, Bank of America, AXA Investment, Thomson Locations: Jordan Rochester, United States, ITALY, Italy, U.S, London, Amsterdam

Summary German public sector secures 5.5% rise for 2024Deal sets precedent, piles pressure on ECB's forecastsECB to raise rates on May 4FRANKFURT, April 24 (Reuters) - The "very generous" pay rise secured by Germany's public sector workers may complicate the European Central Bank's fight against inflation, analysts said on Monday. "The permanent increase next year may raise some eyebrows at the ECB because wages were supposed to peak this year," Natixis economist Dirk Schumacher said. Other economists noted the German public sector pay agreement followed a period of falling real wages, when prices grow faster than salaries. "Doves may argue that the deal comes after a period of wage restraint and is reasonably front-loaded," Christian Schulz, an economist at Citi, said. "This means that it will probably take at least another five years for public sector wages to recover this loss of purchasing power and for employees to have the standard of living they had in 2021," Fratzscher said.

☆ Banking turmoil means recession fears are creeping back
▼ + stars: | 2023-03-29 | by ( ) www.reuters.com time to read: +5 min

Here's what some closely watched market indicators say about recession risks:1/ CRUNCH TIME? Central bankers are closely monitoring the potential for banking stress, on top of lending conditions that were already tightening, to trigger a credit crunch. European Central Bank boss Christine Lagarde has also said the market turmoil may help fight inflation. Reuters Graphics3/ BANK STOCK ROUTWorld shares down just 0.1% in March and still sitting on gains this year seem to signal little recession risk, but worries are mounting under the surface. Global bank stocks, which had outperformed the MSCI World Stock Index before the turmoil, are down nearly 15% this month (.dMIWO0BK00PUS).

While the error margins are unlikely to distort euro inflation in the long-term, economists say they could warp inflation expectations if not addressed, at a time when the European Central Bank is raising rates aggressively to tame double-digit inflation. As falling energy prices will take time to be reflected in household contracts, the current methodology will underestimate inflation when energy prices fall, CBS said. More volatility could follow when Germany introduces a cap on energy prices in March, that will also cut costs for January and February retroactively, he said. Eurostat has said that only measures that have a direct impact on energy prices, known to consumers before they purchase the energy, should reflect in inflation calculations. FEEDTHROUGH RISKSWith inflation at 10%, the calculation issues are unlikely to significantly impact the aggregate euro zone inflation print.

☆ Analysis: Italy's rates clash with ECB a sign of things to come for euro zone
▼ + stars: | 2022-12-20 | by ( Francesco Canepa | ) www.reuters.com time to read: +4 min

Summary Euro zone governments offering cost-of-living subsidiesECB has warned it won't compensate for "policy errors"Clashes seen widening beyond ItalyFRANKFURT, Dec 20 (Reuters) - Attacks by Italy's new government on the European Central Bank over its plans to raise borrowing costs may be a sign of things to come for a euro zone struggling with inflation and debt. It also showed the ECB did not fear penalising the most indebted of the 19 euro zone countries, Italy among them, which tend to see their borrowing costs rise disproportionately when credit becomes more expensive. "The ECB is clearly ready to take risks with fragmentation in the euro area," Gilles Moec, chief economist at AXA Investment Managers, said. With bigger deficits to refinance and the ECB raising interest rates while also winding down its bond purchases, markets have pushed up yields across the euro zone and particularly for the weakest borrowers, such as Italy. But the ECB has been clear it won't be used to rescue countries that have made imprudent "policy errors".

The stakes are high as it potentially affects the future use and effectiveness of extraordinary monetary policies such as bond-buying 'quantitative easing' (QE) and questions the wider political independence of central bank policymaking. The European Central Bank, Bank of England and U.S. Federal Reserve are all - to differing degrees - now facing a backwash from years of policy-driven but lucrative balance sheet expansion. As they lift interest rates, that balance sheet burns a hole in their pockets - or more particularly the pockets of their governments long used to windfalls coming the other way. That will surely climb as the BoE is expected to at least double its policy rate, the rate paid on bank reserves, by May. G4 central bank balance sheetsThe easy-money era is overReuters Graphics Reuters GraphicsThe opinions expressed here are those of the author, a columnist for Reuters.

"It is really not the right time to experiment with fiscal policy," AXA chief economist Gilles Moec said about the UK's moves, assessing that Monday's U-turn may have appeased "the bond vigilantes for now". The term, bond vigilantes, refers to debt investors imposing fiscal discipline on profligate governments by forcing their borrowing costs higher. Ed Yardeni, who coined the bond vigilantes term in the early 1980s, penned a blog post saying "They're Baaaack!" Even U.S. President Joe Biden was speaking the bond vigilante's language at the weekend, noting he wasn't the only one that thought the UK plan was a "mistake". "This is probably the biggest example in practice of the bond vigilantes activity," said Antonio Cavarero, head of investments at Generali Insurance Asset Management.

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