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The central banks’ week brought no surprises.
For starters, the Bank of England kept the interest rate at 5.25% per annum. They expect a significant decline in inflation, projecting it to fall to 4.75% in the fourth quarter of 2023 and further to 3.75% in the second quarter of 2024 from the current 6.7%.
Looking ahead, interest rates are projected to remain around 5.25% through the third quarter of 2024, gradually declining to 4.25% by the end of 2026. However, it is essential to note that the normalisation process will not be rapid.
Similarly, the Japanese regulator left the interest rate unchanged at -0.10%. However, it introduced a change in the language regarding the 1.0% limit on the 10-year JGB yield. The new benchmark limit is now 1%, up from 0.5%.
In addition, the BOJ raised the underlying CPI forecast to 2.8% for 2023 and to 2.8% and 1.7%, respectively for 2024 and 2025. This is an increase from previous estimates of 1.9% and 1.6%. However, there are still many uncertainties along the way.
In particular, Bank of Japan Governor Kazuo Ueda expressed doubts about Japan’s ability to achieve a 2% inflation rate sustainably. He stated that the withdrawal of stimulus measures can only occur gradually once the trend is confirmed.
Finally, the Federal Reserve decided to keep the interest rate unchanged at 5.25%-5.5%. They insisted on their willingness to tighten monetary policy if risks arose that could hinder the achievement of their objectives.
On the part of investors, instead of worrying, they saw a glimmer of hope or, more precisely, the proximity of the end of the rate hike cycle. As expected, this has filled the markets with optimism, the dollar index declined while the Nasdaq closed the week up 6.61%.
On the other hand, long-term bond yields started to decline as early as Tuesday, a day after the Treasury released a lower-than-expected fourth-quarter funding estimate. The decline continued on Wednesday following Jerome Powell’s speech.
On Thursday, bond yields fell again due to weak labour market data. Specifically, the unemployment rate rose from 3.8% to 3.9% (above the 3.8% expected). In addition, average hourly wages increased by 0.2% (below the +0.3% expected).
Speaking now of the outlook, the big concern is that even if Treasury net borrowing remains fairly modest through the end of November, it will rise sharply above expectations, which will again send yields soaring.
