How have interest rate expectations changed after this week’s events?
Rate hikes by year-end
- RBNZ: 65 bps (76% probability of rate hike at the next meeting)
- BoJ: 46 bps (90% probability of rate hike at the next meeting)
- ECB: 37 bps (70% probability of no change at the next meeting)
- BoE: 35 bps (91% probability of no change at the next meeting)
- BoC: 24 bps (94% probability of no change at the next meeting)
- Fed: 18 bps (97% probability of no change at the next meeting)
- RBA: 12 bps (99% probability of no change at the next meeting)
- SNB: 8 bps (99% probability of no change at the next meeting)
You can find last week’s market pricing here
We saw a quick dovish repricing almost across the board following President Trump’s announcement of a virtual agreement on the Memorandum of Understanding that includes the reopening of the Strait of Hormuz. The MoU is expected to be signed in the next few days, potentially on Sunday in Geneva.
Traders forgot about everything else and just focused on the immediate macroeconomic effects: lower oil prices, lower inflation, lower chances of rate hikes.
Looking ahead, the negative supply shock could turn into a strong positive demand shock where we get a boost to economic activity amid easing financial conditions and increased spending. That could eventually require rate hikes anyway, especially in the US, but that will need to be confirmed by the data in the next months. For now, the markets are celebrating.
This article was written by Giuseppe Dellamotta at investinglive.com.