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
And here are the details:
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
Here are the details:
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
By the end of this month, the Federal Reserve will have completed its asset purchase program, bringing its second round of Quantitative Easing to an end. As QE2 draws to a close, it is worthwhile to consider how the dollar could react. When the first round of Quantitative Easing came to an end, we saw a massive dollar rally (see EUR/USD chart below). USD/JPY did not participate in the rally because of lingering concerns about the need for more stimulus (second chart). The dollar index on the other hand rallied as much as 10 percent as the greenback strengthened against high yielding currencies (third chart) – this suggests that once QE2 ends, we could see a more significant dollar rally.