06.04.2023 – The situation on the financial markets is currently very opaque. On the one hand, the major central banks are not supposed to raise interest rates further because of the threat of recession. On the other hand, inflation is being kept in check. This argues for high interest rates. More clarity for the US should come from the non-farm payrolls, which will be released tomorrow, Good Friday. Until then, there is an international back and forth.
Brokers have been looking overseas for clarity lately. But there have been mixed signals there, too: New Zealand’s central bank surprised by raising interest rates by half a percentage point – twice as much as expected. Governor Adrian Orr argued that inflation was too high and that inflation expectations remained stable despite the weaker economy.
Interest rate pause in Australia
The Reserve Bank of Australia also struck hawkish tones. Governor Philip Lowe warned that the interest rate tightening cycle was not over yet. This is all very contradictory: Australia paused shortly before and left the policy rate unchanged at 3.6%. Meanwhile, the Bank of England continues its upward trajectory: it recently raised rates for the eleventh time in a row to 4.25%. Analysts expect another quarter percentage point hike at the May meeting. Here is a four-hour chart of the GBPAUD to keep you up to date with this news.
Source: Bernstein Bank GmbH
A look at the US employment data.
This brings us back to the US. Goldman Sachs just warned of a shocking rise in tomorrow’s jobless claims. But Danni Hewson, head of financial analysis at AJ Bell, sees little chance of an end to tightening even with strong recession signals: “On the positive side, the rate rise could pause, which would normally be positive for equities.” But: “The worry is that the Fed may have to blow the bugle before it actually ends its war on inflation. That could lead to the worst of all worlds – the dreaded stagflation, where the economy shrinks but prices continue to rise sharply.” That would mean high interest rates and a tendency towards a hard dollar.
Probably not the end of tightening yet
“The battle against inflation seems far from won,” says Ivailo Vesselinov, chief strategist at Emso Asset Management in London. Notwithstanding recent signs of slowing economic activity, central banks may be forced to keep raising interest rates: “If disinflation hits a wall later this year, major central banks will struggle to confirm current market prices for rate cuts.”
Our conclusion: most experts believe that the world’s central banks – led by the Fed – cannot yet stop tightening monetary policy, let alone cut interest rates again. As seen with the Australian dollar, currencies that pause will take profits on the short side. So keep an eye on the real-time economic data – Bernstein Bank wishes you successful trades and investments!
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