G10 central banks didn’t have to push back against the rapid easing of financial conditions in January,
the data did it for them. The widely held expectation of softening inflation numbers repeatedly failed to
eventuate, including the core PCE in the US, a data point specifically focussed on by the US Fed Chair. As a
result, over February, the enthusiasm for any rate cuts happening later in 2023 has mostly been priced out,
along with rates for the following year rising by up to 120bps.
So where do we go from here?
Inflation data points take on even greater significance. Central banks are looking for an intermission to
assess the impact of the fastest rate rising cycle since Volcker. However, if inflation data keeps increasing
via tight labour markets, and supply constraints, then central bank’s may be forced to further accelerate
hikes. This runs the real risk of a much harder economic landing down the line. On a more positive note, the
resolution of the Northern Ireland trade border predicament hopefully enters an age of more pragmatic
dealings between the UK government and the EU, whilst the latest PMI data from China also gives
momentum to the global engine. The new BoJ governor Kazuo Ueda expressed “business as usual” ie loose
policy, much to the frustration of an excited Yen rates market.
Over the month the RBNZ, ECB, BoE and Riksbank all hiked by 50bps, while the RBA and Fed hiked by
25bps. The Norges Bank and BoJ were unchanged.
The US 10y closed the month 46bps higher and 5s-30s swap was 30bps flatter.