Inflation, interest rate hikes continue to wreak havoc across the US, EU and UK

Summary

Money markets continue to price in higher peaks for central banks rates, which include the U.S. and EU, as economic growth is holding up better than expected as CPI inflation continues to run hot, and yields continue to rise.

The mantra across central banks is ‘Higher for longer’ as the US money market swaps price at a peak rate of 5.5%. The future feds funds rate is consistent with three additional 25 basis point hikes, with no rate cuts until 2024.

The EU

Inflation

Inflation continues to riot in Europe, as Eurozone headline inflation was forecasted to fall to 8.3%. However, it slowed down to only just 8.5%. Energy inflation dropped considerably to 13.7% from 19%. However, the issue that raised concern was core inflation rising to a record high of 5.6% against 5.3%.

Strong data continues to put pressure on ECB

February S&P manufacturing PMIs for the southern region (Italy and Spain) rose far more than expected in expansionary territory. At the same time, Germany’s unemployment remained at 5.5% for seven months, indicating a more resilient workforce than expected.

The U.S.

U.S. house price declines accelerate

The S&P CoreLogic 20-city, house price index fell faster than expected, which saw the year-over-year price growth rate down from 6.8% to 4.7%. This index is a lagging indicator of prices on a three-month average going as far back as Q3 2022.

While 30-year mortgage rates have topped 7% again, mortgage applications for home purchases fell as much as 6% last week, following an 18% drawdown the week prior.

The U.S. economy is still hot

ISM services got released in March 3, which showed that the U.S. economy is still extremely strong. Services were better than expected, lower prices paid, stronger employment, and stronger new orders.

All eyes on FOMC

The next FOMC meeting, which takes place on March 22, will include an update of the Fed Dot Plot and an update on the summary of economic projections, which will have greater significance than just a 25 or 50bps raise by the fed.

The U.K.

Record food inflation

Troubling times are ahead for the U.K. as shop price inflation accelerated by almost double digits in February, while food price inflation reached a record 17.1%, according to the British Retail Consortium.

BOE caught between a rock and a hard place

Yields up, GBP down as the BOE struggles in many different ways. Unlike the Fed and ECB, who have devised a hawkish plan for 2023, the BOE continues to flip-flop with no clear direction. The pound at $1.199 approaches a year-to-date low while the yield curve continues to steepen.