Markets are still fixated on the path of rates and after recent data have moved quickly to discount hopes that we have seen the peak in the hiking cycle and terminal rates have been found.
However, markets are not necessarily listening to what Central Bankers are actually saying.
Hopes abound that the US will achieve a soft landing and the Federal Reserve is done, although there still remains the chance of a final 25bp hike in early 2024. The FOMC kept its policy rate unchanged but kept a tightening bias. The sheer scale of funds to be raised through sales of Treasuries has refocused minds and a run of poor auctions ended in an ‘outright bad sale’ of $24Bn in a 30-year auction which sent yields sliding. Recent sales have been better, but this needs to be monitored closely.
The ECB held at 4% but also retained a tightening bias. Numbers from Germany showed that GDP stayed stronger than expected and, along with fast moderating inflation numbers, maybe the biggest driver of EU growth being in a better position than feared. The ECB has still to start QT meaningfully but weaning Eurozone banks off this support will be a long haul.
Despite halving the rate of inflation, getting to the 2% target from here will be harder, ‘remaining’ inflation has become more UK centric as outside influences (moderation of energy prices) subside. BoE thinking has become more ‘data dependent’ which will dictate the ‘path of rates’ according to deputy Governor Ramsden, I would have thought this is always the case. The Bank delivered a ‘hawkish hold’, but the market behaved otherwise and we saw a fair move in yields in what was mostly a parallel shift across the curve. Since the meeting, Andrew Bailey and several members of the MPC have been at pains to say that rates are to stay restrictive for an extended period so the table mountain analogy looks to be set. Politics intrude as a General Election appears on the horizon and Rishi Sunak states that now ‘he’ has achieved halving inflation ‘we can begin to cut taxes’, however the Autumn Statement had little material tax reductions.
We continue to see a healthy primary market across all currencies with many of the names we want to see coming to market. New issue premiums are fair and spreads remain stable, sterling spreads continue to perform well.
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