NEW YORK: Expectations about how much central banks need to tighten monetary policy to fight soaring inflation have surged yet again, shaking global markets and rattling investors.
Among the eye-catching moves by monetary authorities in recent days has been a 75 basis point hike by the Federal Reserve – the biggest U.S. rate hike in nearly three decades – the Swiss National Bank’s first hike in 15 years and another 25 basis point -point hike by the Bank of England.
Investors are bracing for bolder moves. In the United States, federal funds futures on Friday priced a 44.6% chance that the federal funds rate would hit 3.5% by the end of the year, from the current level of 1, 58%, according to CME’s FedWatch. This probability was less than 1% a week ago.
Growing aggressiveness has fueled wild moves in global markets as central banks rush to undo monetary support measures that have helped propel asset prices higher for years.
Fears that the Fed’s aggressive rate hike path could push the economy into recession have grown in recent days, slamming stocks – which entered bearish territory earlier this week when the S&P 500 extended a drop from its record to more than 20%. The index’s 6% drop this week put it on pace for its worst weekly decline since March 2020.
Europe’s Stoxx 600 index is down about 17% this year, while the average Nikkei stock in Japan is down about 10%.
Changing rate expectations also triggered sharp swings in bond and money markets. The ICE BofAML MOVE Index, which tracks the volatility of Treasuries, is at its highest level since March 2020, while Deutsche Bank’s Currency Volatility Index, which measures expectations for currency movements, also increased this year.
Markets have rearranged bets on the European Central Bank’s rate hike since last week’s ECB meeting, with the ECB now expected to hike 25 basis points in July and at least a hike of 50 basis points by September. Some economists say plans to create a new tool to contain stress in bond markets should give the central bank more leeway to offer aggressive rate hikes if needed.
Money markets now expect around 272 basis points of increases by July 2023, bringing rates to 2.1% by that date. This compares to a 1.5% increase at the start of 2024, at the start of June price.
In Australia, futures show markets braced for the benchmark rate, currently at 0.85%, to top 4% next year against central bank officials’ forecast for a peak in rates of 0.85%. about 2.5%.
Britain’s benchmark rate is now at its highest since January 2009, when borrowing costs were slashed as the global financial crisis raged. It was the fifth time the BoE had raised rates since December, when it became the first major central bank to tighten monetary policy in the wake of the COVID-19 pandemic.
Overall, global central banks have already raised rates 124 times so far this year, compared to 101 increases for all of 2021 and six in 2020, according to data from BofA Global Research.
A notable exception to the trend was the Bank of Japan, which stuck to ultra-easy metrics and committed to buying 10-year bonds every day to anchor borrowing costs.
However, the speculators who bet on a final capitulation do not seem particularly discouraged. The Japanese yen slips, the yield curve distorts and the bond market nearly collapses in the fight between hedge funds and policymakers.
The monetary policy tightening follows the worst inflation many countries have seen in decades. Consumer prices in the United States, for example, rose at their fastest pace since 1981 in May.
Higher rates, soaring oil prices and market turmoil all contribute to the toughest financial conditions since 2009, according to a Goldman Sachs index that uses metrics such as exchange rates, stock moves and costs to compile the most widely used indices of financial conditions.
Tighter financial conditions can result in businesses and households reducing their spending, saving and investment plans. A 100 basis point tightening of conditions reduces growth by one percentage point the following year, according to Goldman.