February 16, 2023
United States:
US Rates May Be Heading Higher Than Wall Street or the Fed Think
Last year, most US investors and central bankers underestimated how high inflation would climb. Now they may be underestimating how high interest rates will need to go to bring it back down.
In spite of the Federal Reserve’s most aggressive credit tightening campaign in four decades, the US economy and financial markets started the new year with a bang. Payrolls surged, retail sales jumped and equity prices soared.
Europe:
Morgan Stanley Bullish on Euro as Economy Can Endure More Hikes
A closely-watched interest-rate metric has convinced Morgan Stanley strategists that the euro area can withstand further increases in borrowing costs, boosting their bullish view on the single currency.
The near-term forward spread — the difference between the three-month rate and where investors see it in 18 months’ time — is inverted for markets including the US and New Zealand, but remains roughly flat for the euro zone after declining in January. That’s a sign that the European Central Bank can keep cranking up interests to tamp down on inflation without having to worry too much about the economic impact, said David Adams, head of Group-of-10 FX strategy at the bank.
Asia:
Japan’s Money Printers Will Soon Be Under New Management
A decade ago the Bank of Japan led the way with an unprecedented experiment in monetary stimulus. To support Abenomics, named after then-Prime Minister Shinzo Abe’s aggressive bid to revive an anemic economy, the central bank massively increased purchases of government securities and eventually moved to cap yields on government debt. With the benchmark interest rate already negative, the combined effect was like having gigantic money-printing machines running constantly at full tilt.
Now, with inflation running well above the BOJ’s comfort zone, policymakers are having to ponder how best to make a monetary policy pivot that doesn’t spook markets.
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