Have Central Banks Peaked?

The year's final central bank rate decision season is set to leave policy unchanged, with a keen interest in guidance for the coming quarters. Did they all quietly peak?

The Path Towards Cuts

The consensus among economists is that the three major central banks meeting over the next couple of days - the Fed, ECB and BOE - will leave interest rates unchanged. Markets have moved on to looking forward to when the subsequent policy easing will happen, with traders focused on comments from policymakers for clues for when the first sign of easing will happen. Central banks have insisted that rates will remain high for an extended period of time, but markets are pricing in ever sooner rate cuts. Some of the banks will provide economic forecasts that investors will look for as indications that the tightening bias has not only pivoted to hold but might pivot to cutting.

The Fed: The markets expect the Fed to hold rates at the current level through the first quarter of next year, with the first cut expected in May. This contradicts the forecasts of rate policy by FOMC members in the so-called "dot plot" matrix, which saw rates stay elevated until the end of the year. But the Fed will update its dot plot matrix following this meeting, with the market looking for a downward revision that would justify the downsloping curve in forward yields. If the Fed were to stick to its hawkish guns despite the November CPI in line, but after a stronger NFP result for the month, the dollar could gain.

The ECB: The ECB is widely expected to follow through on its promise from the last meeting to keep rates unchanged, but traders will be closely scrutinising for cracks among the hawks. Previously, all members had said that interest rates would remain at 4.0% for the rest of the year, with the line being that it's too early to talk about cuts. But Germany's representative to the ECB, Isabel Schnabel, shook up the outlook last week, suggesting that conditions might be met for a cut in the middle of the year. The market is pricing in 150bps of cuts over the next twelve months, but economists think the cuts won't be as severe. Weighing on the decision is the fast decline in CPI in recent months, which has come along with a slowing economy and increasing pressure on the shared central bank to support growth. The ECB had for decades been fighting conditions of anaemic growth and low inflation as a result before the pandemic, and the situation might be returning.

The BOE: For the pound, investors are likely to focus more on the vote count for the policy decision, as the strong consensus is that the BOE will keep rates on hold. Last time, it was 6-3 to pause rate hikes, and a shift in that number could be interpreted as a move towards hawkishness or dovishness. The BOE is facing an additional challenge compared to the other two major central banks on this list, as British wage growth has continued to outpace inflation and maintain price demand. Even though the rate has declined, the UK still has the highest inflation among major economies. With the country expected to avoid a technical recession through the winter, the BOE might have more room to keep up the tightening pressure and disappoint markets that are increasingly pricing in rate cuts next year.

Nasdaq Eyes Record Highs

While central banks prepare to set the tone for forward policy this week, the Nasdaq remains over 2% from record highs. Following a flag pattern to 14K, the index has risen impulsively past 15950 and maintains a bullish bias until at least a double top to the record high of 16770. If the upward move continues, the measure-move projection points to an extension to 17K. Conversely, losing 15700 may bring 15330 and  14680 back in focus.

Source: Spread Ex / US TECH

Key Takeaways

This week, the Fed, ECB and BOE are all expected to leave interest rates unchanged at their final policy meetings of the year. However, investors will be watching closely for any signals about the path of rates in the coming quarters. While immediate policy moves are not expected this week, central banks are under pressure to clarify the outlook for interest rates in 2023 as markets increasingly price in rate cuts.