The Fed’s message was handed and understood; markets modify to new occasions

High interest rates, as in the US, were followed by central banks in several countries, such as England, South Africa, Norway and Switzerland.

The message was given by the Federal Reserve – after announcing a new interest rate hike by 75 basis points – and understood by the market and other monetary authorities around the world: interest rates in the US will continue to rise and for a longer period than estimated. before. And this at the cost of an economic downturn that could even turn into a recession.

Galápagos Capital assesses that there will be harsh implications for the markets. “With a more austere message from the Fed and a market that has yet to adjust, we believe the pressure on central banks will persist,” the brokerage says in a report.

According to the analysis, the likelihood is that monetary authorities are likely to slightly increase their tightening cycles to reflect tighter financial conditions globally. And that the currencies will remain under pressure, given the natural appreciation of the dollar due to the inversion of the flow.

This was proved already this Thursday with new monetary policy decisions: central banks around the world – with the exceptions of Japan and Turkey – are now on the contractionary team.

For Rio Bravo, the decision and the speeches already came in a harsher tone, but what impressed the position “hawkish” from the Fed were the projections (the so-called “dot plot”), which pointed to higher interest rates for longer, in addition to the prospect of modest growth in the US economy for the next few years.

highest

From those less optimistic projections, BBVA Research said it now expects the Fed to print further increases this year, adding 125 basis points (a new 75-point high in November and another 50 bp in December).

For the bank, rate cuts are still likely in 2024, but could even come sooner, towards the end of 2023, if core inflation falls faster than currently forecast.

“As of now, we expect the Fed to keep rates unchanged at 4.75% for most of 2023, after a 25bp hike also in January,” predicts the house.

Julio Hegedus Netto, chief economist at Mirae Asset Wealth Management, believes the Fed’s message has been well understood. “In the US, the Fed reinforced the narrative that it is necessary to ‘do it all at once,’ not to wait any longer. About the next steps, everything will depend on the next indicators. The terminal fee could reach 5.0% perhaps next year,” he wrote.

impacts

Volatility has still marked the behavior of the stock exchanges today, as happened on Wednesday. Yesterday, as expected, the New York indexes retreated shortly after the Fed’s announcement (at 3 pm), but returned to the positive field at the beginning of Jerome Powell’s press conference. And they fell again when he made comments about concerns about the US housing market.

Today, stocks in New York operate mostly in the negative, but they had brief moments of high. The Ibovespa is now advancing after Copom announced a halt in the Selic’s upward cycle yesterday, keeping it unchanged at 13.75%.

Even with the warning that the Brazilian monetary authority may raise interest rates again if inflation proves to be resistant, there are still doubts about future decisions.

BGC Liquidez carried out a survey with 128 institutional players that trade in the Brazilian financial market to find out about the expectations for the following meetings: 98% believe that the rate will remain unchanged until the end of the year.

Central banks on the same team (or almost)

Switzerland finally came out of its seven-year negative interest rate policy and announced a 75 basis point hike in its rates, moving the prime rate to 0.50%.

Norway’s central bank on Thursday also raised its benchmark interest rate by 50 basis points to 2.25% and predicted a further increase in November is “likely”.

The Central Bank of England (BoE) then raised its rate by 0.5 percentage points to 2.25% per annum. The monetary policy committee (MPC) warned that it would “take the necessary steps to bring inflation back to the 2% target on a sustainable basis over the medium term”, in line with the Fed’s communication.

Attention was drawn to the fact that the decision was split, with votes for both a tougher rise of 75 points and a slowdown of 25 bp. But analysts point out that the BoE’s erratic decisions are explained by the fact that the board has an academic predominance.

against the tide

Swimming against the tide, for now, only the Central Bank of Turkey, which – despite the highest inflation since 1998 – has again cut the basic interest rate in the country by one percentage point, from 13% to 12%.

Before that, the Japanese monetary authority (BoJ) kept its negative rate at 0.1%. This triggered a run against the local currency that forced the Central Bank to intervene in the exchange rate for the first time in 24 years.

Interest rates: check out the main recent changes made by several central banks:

• USA: ↑ 3.25% (from 2.50%, +0.75), on 9/21
• Brazil: = 13.75% (same), on 9/21
• Japan: = -0.10% (same), on 9/22
• UK: ↑ 1.75% (from 1.50%, +0.50), on 9/22
• South Africa: ↑ 6.25% (from 5.50%, +0.75), on 9/22
• Turkey: ↓ 12.00% (from 13.00%, -1.00), on 9/22
• Switzerland: ↑ 0.50% (from -0.25%, +0.75), on 9/22
• Norway: ↑ 2.25% (from 1.75%, +0.50), on 9/22
• Sweden: ↑ 1.75% (from 0.75%, +1.00), on 9/20
• Russia: ↓ 7.50% (from 8.00%, -0.50), on 9/16
• Argentina: ↑ 75.00% (from 69.50%, +5.50), on 9/15
• Eurozone: ↑ 1.25% (from 0.50%, +0.75), on 9/8
• Canada: ↑ 3.25% (from 2.50%, +0.75), on 9/7
• Chile: ↑ 10.75% (from 9.75%, +1.00), on 9/6
• South Korea: ↑ 2.50% (from 2.25%, +0.25), on 8/25
• China: ↓ 3.65% (from 3.70%, -0.05), on 8/22
• Source: Infomoney