Sunday, October 1, 2023

Markets remain nervous on the eve of the two-year rate projections in the United States.

The market is a little more nervous than usual. After the 25 basis point rise in the ECB’s official rates (up to 4% for the deposit rate, its highest level since the creation of the euro), it is up to the Federal Reserve (Fed) to decide, or not, on a new increase in their rates.

If opinions were divided on the eve of the ECB meeting, investors are convinced (99% according to the CME group’s FedWatch index) that the Federal Reserve will keep its rates unchanged tomorrow afternoon, Wednesday. And traders, based on the same index, estimate the probability of an increase in late October/early November at only 29%.

The change of tone in Jerome Powell’s speech at the Jackson Hole symposium apparently convinced investors and traders that the US central bank itself was convinced it had done the job in its fight against inflation. “Jerome Powell’s speech was much more confident in the effectiveness of monetary adjustment”emphasizes economist Véronique Riches-Flores

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A new increase is not ruled out

Of course, there is this nervousness, this volatility, especially in short-term rates. In the markets, the gap (spread) between the Federal Funds rate (overnight interbank rate) and Libor (three-month interbank rate) even leaves room for an increase of 25 basis points between now and the end of the year. “It is a possibility that is not “valued” by the market. Libor at the end of December remains at 5.5%, which puts the Federal Fund at around 5.3 or 5.4%, the current level. The market clearly plays a status quo »deciphers a rate manager.

But the wait is elsewhere. All the market’s attention will be focused on the rate projections (“dot plot”) made by the central bank every three months. “The current debate is no longer really about the status quo or not, but rather the tone of the Federal Reserve’s speech and the governors’ famous estimates about the level of federal funds in the next two years, while the market continues to experience a drop of 100 basis points by December 2024 »says Pierre Diot, rates manager at Vega Investments Managers.

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Room for maneuver

However, one certainty: the Federal Reserve (like the ECB) will not take the risk of announcing a terminal rate to maintain its room for maneuver. Central banks, they have often repeated, are data dependent, like the markets ultimately.

And the publication this Tuesday of a 10% drop in US housing construction, from one month to the next, should argue for a status quo, especially when the main indicators are falling, while household morale is in the middle. pole. The first cracks are being heard in the labor market, not to mention the resumption of student loan payments starting October 1.

Rate hike: ECB refuses to let down guard, inflation still too high

In fact, this is a decidedly Federal Reserve speech.” hawk » (restrictive monetary policy) that could shake the markets. Unlike the ECB. “We expected (from the ECB, editor’s note) an aggressive status quo, but we had a moderate increase (accommodative policy, editor’s note),” summarized a note from Natixis bank. According to a Reuters poll of 70 economists, the ECB has ended its policy of raising rates. These economists estimate there is less than a one in five chance of a possible rate hike before the end of the year.

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In the United States, most economists believe that the Federal Reserve will still prepare the ground for a new (and final) increase before the economic numbers are really bad.

“A rate of 5.5% does not surprise anyone in the United States, but a rate of 4% in Europe, which is going to fall into recession, is dramatic”, summarizes an analyst. Meanwhile, markets anticipate the next rate cuts starting in March/April 2024 in the United States. And from March 2024 in the euro zone with a probability of 50%, according to AXA IM.

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