Never-ending Hikes

World Markets

The Federal Reserve and the Bank of England are all but certain to deliver jumbo 75-basis point rate hikes on Wednesday and Thursday, respectively, as the battle against sky-high inflation continues. However, with investors now on the lookout for signs that aggressive monetary tightening could start to slow, today’s Eurozone inflation report and Friday’s U.S. jobs report for October will be in the spotlight.

GBP: The Bank of England looks set to raise interest rates by 75-basis points on Thursday; its eighth consecutive rate increase as it battles inflation currently running above 10%. Expectations for a full percentage-point rate hike were trimmed back last week after new Chancellor of the Exchequer Jeremy Hunt reversed almost all of former Prime Minister Liz Truss’s planned tax cuts and shortened her energy cap program to six months from two years. However, the delay of the first budget plan of the new government until Nov. 17th will make it harder for the BoE to spell out its economic forecasts. Furthermore, after delays caused by recent financial market turmoil, the BoE is also due to start selling bonds from its stimulus stockpile on Tuesday.

EUR: The Eurozone is set to release its flash inflation estimate for October today which is expected to come in at a record high of 10.2%. In fact, in a move to anticipate the extremely high reading, last Thursday the European Central Bank delivered its second 75-basis point rate hike in a row. Furthermore, subsequent remarks by policymakers indicated that it would continue tightening in the coming months in order to prevent inflation from becoming entrenched, despite fears over a looming recession. The euro area is also to release preliminary GDP figures for the third quarter, which are expected to show a small expansion, but most economists anticipate the bloc’s economy to enter contraction territory in the fourth quarter.

USD: The Fed is widely expected to raise interest rates by 75-basis points for a fourth straight time at the conclusion of its two-day policy meeting on Wednesday. Investors instead will be looking to Fed Chairman Jerome Powell for any hints that the future pace of hikes could slow after recent softer economic data. Financial markets are currently pricing in a smaller 50-basis point rate hike at the Fed’s December meeting and another 50-basis points over the first two meetings of next year. However, betting on a less hawkish Fed has been a risky strategy so far this year. Stocks have repeatedly rebounded from lows amid hopes for a so-called “Fed pivot”, only to be pressured lower again by persistently high inflation and aggressive monetary tightening. For now, the tone of Wednesday’s Fed press-conference and Friday’s October U.S. nonfarm payrolls report will likely be key in helping investors set expectations ahead of the central bank’s December meeting.