How have interest rate expectations changed after this week’s events?
Rate hikes by year-end
- RBNZ: 52 bps (91% probability of rate hike at the next meeting)
- ECB: 40 bps (94% probability of rate hike at the next meeting)
- BoJ: 35 bps (67% probability of rate hike at the next meeting)
- BoE: 27 bps (81% probability of no change at the next meeting)
- Fed: 23 bps (65% probability of no change at the next meeting)
- BoC: 20 bps (97% probability of no change at the next meeting)
- RBA: 15 bps (85% probability of no change at the next meeting)
- SNB: 5 bps (91% probability of no change at the next meeting)
We just had two major events this week: the Treasury buyback announcement and Trump’s pledge to strangle Iran economically.
In terms of economic data, we haven’t got anything to change materially the outlook for central banks. The UK employment and inflation reports just reinforced the current BoE’s “wait and see" stance given the soft jobs data and largely in-line CPI figures.
The same thing can be said about the RBA and BoC, as Australia’s jobs data surprised to the downside, while Canada’s underlying inflation measures continue to hover around target.
Finally, Japan’s Core CPI, which is what the BoJ targets, matched expectations coming in at 1.8% y/y, an increase from the 1.6% rate in the prior month, but still below the 2% target. The market already expects the BoJ to hike interest rates in September, so that’s largely priced in. Traders will be more focused on potential signals of faster tightening going forward.
Going back to the two main events of the week, the Treasury buyback announcement eased financial conditions as long-term Treasury yields declined, while inflation expectations rose on “debasement" concerns. This is going to be the main narrative driving markets in the next weeks and traders will be focused on the Federal Reserve’s response as Bessent’s intervention works against the central bank’s objective.
On Iran, Trump vowed crushing economic warfare against Tehran, suggesting the deadlock could extend much further than market’s expected. This will likely keep oil prices supported or lead to even higher prices going forward (i.e. inflation). Bessent mentioned that there will be a press conference on Monday to discuss actions against Iran, adding that the sanctions will be the toughest in history.
This article was written by Giuseppe Dellamotta at investinglive.com.