The Federal Reserve, European Central Bank and the Reserve Bank of Australia have monetary policy meetings scheduled this week and some investors expect these central banks to change monetary policy. Here’s what the market is pricing in according to interest rate futures. You can compare them with the Central Bank expectations back in September. What is interesting is that the market does not expect the ECB to cut interest rates this year even though many economists predict a 50bp cut in December. FED – Nada for 2011 and 2012
ECB – 25bp rate cut by July (sharp upgrade from Sept when rate cut expected in Dec)
BOE – Nada for 2011 and 2012 but slight shift to dovish bias
BOC – Rate Cuts now expected in 2012, down from rate hike by April
RBA – 25bp Rate cut by Dec – upgrade from 100bp by year end
RBNZ – No Major Changes, Rate Hike Expected July 2012
Even though ECB President Trichet was quite clear last week in signaling that rate hikes are not over, based upon interest rate futures, investors are actually pricing in NO RATE HIKES for the rest of the year and into the first half of 2012.
Since the beginning of the year, the ECB insisted that the sovereign debt crisis would not affect their monetary policy decisions which are made based exclusively on the levels of inflation but investors believe that the crisis cannot be ignored.
The other major changes are the following:
RBA – Market now expects a Rate Cut in October
FED – No rate hikes expected before the second half of 2012
BOE – No rate hikes expected before the second half of 2012
RBNZ – First rate hike pushed out from Jan to March
BoC – First rate hike pushed out from Feb to April
The latest economic developments have caused investors to push out their rate expectations for all of the major central banks. In May, the ECB, BoC and RBA were all expected to raise rates before the end of the year and now aside from the ECB no one is expected to tighten. Rate expectations are always changing and a lot has happened over the past month. It is always important to keep track of them because they reflect what investors are pricing in!
Here are the latest numbers and highlights (compared to May – click to enlarge)
Fed – One 25bp rate hike expected by Q2 2012
ECB – 50bp of additional tightening expected by end of year
BoE – First Rate hike expected in May > compared to prior forecast for 25bp rate hike in Jan
RBA – No rate hike within the next year – major downgrade from past expectations
RBNZ – One rate hike in March 2012 > pushed out from Jan 2012
BoC – 25bp rate hike in Feb > pushed out from Oct
I was on CNBC last night talking about the outlook for the euro and U.S. dollar. If you caught the live hit, you would have heard me talk about the EUR/USD and how the rally yesterday should not be mistaken for a turn in the EUR/USD. “The sovereign debt troubles still plague the currency”
It has been a while since I provided updated numbers for the market’s rate hike expectations and I will chalk it up to my travels! Rate expectations are always changing and a lot has happened over the past month. Its always important to keep track of them because they reflect what investors are pricing in!
Fed – One 25bp rate hike expected by Q2 2012 > Compared to Q1 rate hike before BoE – First Rate hike expected in Jan > compared to prior forecast for 50bp rate hike in 2011 ECB – 50bp of additional tightening expected > compared to 75bp after April hike RBA – Close to one 25bp rate hike by years end > significant upgrade from March expectations RBNZ – One rate hike in Jan 2012 > bumped up from March BoC – 25bp rate hike in Oct > slight downgrade in rate hike expectations