Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Central bankers are in the spotlight today, putting investors on edge as they brace for higher interest rates and the withdrawal of monetary stimulus.
Anxiety about the prospect of higher US interest rates has been hurting markets in recent weeks. The US Federal Reserve is setting policy today, and is expected to signal that its hiking cycle will begin in March.
With US inflation surging to 7%, and unemployment back down at 3.9%, the Fed can make a case for tightening. But it faces a communications challenge to spooking markets which have grown used to loose monetary policy, with four rate hikes this year now being priced in.
Jim Reid, strategist at Deutsche Bank says Fed chair Jerome Powell faces “an interesting day of communications”, particularly when outlining how he’ll approach quantitative tightening (QT).
That’s the process of running down the Fed’s balance sheet which has swelled through its bond-buying stimulus programme, which is on track to end in March.
The year-to-date selloff of real rates and equity markets began with the Fed surprising markets by how much they were already considering an early and aggressive use of QT to augment their tightening of policy, so any incremental information will be devoured.
While it’s likely too early for the Fed to deliver specific QT details today, our economists believe it’s possible Chair Powell begins to socialise a range of potential QT outcomes to start the give-and-take involved with guiding market expectations.
The Bank of Canada is also meeting today, and it could possibly raise interest rates – as it tries to pull inflation down from a 30-year high of 4.8%
Trading in overnight swaps markets suggests there’s about a 70% chance the BoC will raise the benchmark interest rate to 0.5% from its emergency low of 0.25%, Bloomberg reports.
Adam Cole of Royal Bank of Canada thinks the BoC will hold off from hiking today, but says it’s a very close call.
Inflation trends have been evolving largely in line with the BoC’s latest forecasts but that still represents price growth substantially above the 2% target rate. The Bank’s quarterly Business Outlook Survey showed business capacity pressures and labour shortages intensifying significantly – along with expected inflation and wage growth.
It’s already been a volatile week, particularly on Wall Street, where the Dow Jones industrial average has bounced back from 1,000-point falls twice in a row.
European markets are set for a higher open, after plunging on Monday and then recovering a little yesterday.
But with tensions over Ukraine still high, it could be another volatile day.
- 7.45am GMT: French consumer confidence report
- Noon: US weekly mortgage applications
- 1.30pm GMT: US goods balance for trade
- 3pm GMT: Bank of Canada interest rate decision
- 7pm GMT: US Federal Reserve interest rate decision
- 7.30pm GMT: Fed chair Jerome Powell’s press conference