(Repeats with no changes to text)
By Mike Dolan
LONDON, Feb 3 (Reuters) - For all intents and purposes,
financial markets think the brutal central bank tightening cycle
is done.
That may seem like a leap of faith after 36 hours in which
three major central banks lifted their main policy interest
rates yet again - and warned of more to come.
And yet policymakers and markets can probably reconcile
those apparently contradictory views, if what you really care
about it is where policy interest rates are at the end of the
year rather than dwelling on the 'ifs' and 'buts' about what
temporary peak they may or may not hit in the interim.
U.S. federal funds rate futures now see the policy rate at
about 4.39% at the end of 2023, just over a quarter of a
percentage point below the mid-point of the new 4.50%-4.75%
range the Federal Reserve set on Wednesday after it hiked rates
by 25 basis points. Two-year Treasury yields dropped to within a
whisker of the 4.00% level, the lowest in four months.
Even though Fed Chair Jerome Powell, speaking in a news
conference after the end of the policy meeting on Wednesday,
talked loosely of a "couple of hikes" more in the pipeline, he
claimed he was "not particularly concerned" with that full-year
market view.
There will much huff and puff and second-guessing over what
happens in the meantime. Markets are priced for just one more
quarter-percentage-point hike. The Fed still seems loathe to
guide too assiduously and prefers to keep its options open.
But stock and bond investors certainly see the horizon
clearing rapidly. While a return of FOMO - fear of missing out -
is inevitably part of the dash to catch 'peak rates', there's
every reason to think disinflation is well underway.
Powell was unequivocal about that much at least. "We can now
say for the first time that the disinflationary process has
started," he told reporters.
Goosed by a positive twist to the earnings season from Meta , the Nasdaq has climbed 5% in just two sessions, its
best two-day spurt since November and following its best January
since 2001. The S&P 500 index surged too and -
significantly - Wall Street's main gauge of implied volatility sank to its lowest level in more than a year.
CORNER TURNED
A similar rates picture unfolded in Britain after the Bank
of England executed its 10th straight interest rate rise on
Thursday, bringing its main policy rate up half a percentage
point to 4.0%.
Even though money markets see one more
quarter-percentage-point hike in the works - pricing for the end
of the year shows the Bank Rate now a fraction lower than it is
now, essentially signalling that the BoE is either done already
or that it will have reversed any additional mid-year move by
then.
Like Powell, BoE Governor Andrew Bailey reckoned inflation
had "turned the corner" - even though he said "it's too soon to
declare victory just yet."
Bailey may be right, but it's not hard to see why investors
are now homing in on the limits of any tightening from here.
Judging by this week's latest International Monetary Fund
forecasts at least, Britain is the weakest of the G7 economies
and the only one set to contract this year - with myriad
peculiar domestic problems from Brexit to tax rises and energy
shocks as well as serial labour strikes.
Elsewhere, the Bank of Canada already signalled last month
that it's pausing its rate rises. And the Bank of Japan insists
it's still in easing mode.
The European Central Bank's decision on Thursday to hike its
policy rate further by half a percentage point to 2.5% and
signal at least one more increase of that size in March puts it
in a different if slightly lagged place. But even there, money
markets barely see the rate below 3% in a year's time.
Jason Draho, head of asset allocation Americas at UBS Global
Wealth Management, reckons "there's little investment value in
over-analyzing a central banker's mindset."
And in some ways, that's fuelling a rush to second-guess the
ultimate outcome - even if it ends up taking value out of asset
prices quickly and potentially seeding more volatility
longer-term.
"Far from putting an end to market momentum ... yesterday's
FOMC (Federal Open Market Committee) outcome is more likely to
exacerbate it for the time being," Draho wrote. "That will
heighten investor FOMO at the same time that the risk-reward
trade-off for many assets becomes less attractive."
And if the central banks themselves seemed inclined to allow
markets to do their own thing this time around, then it was left
to the IMF to act as head teacher.
"Central banks should communicate the likely need to keep
interest rates higher for longer until there is evidence that
inflation - including wages and prices of services - has
sustainably returned to the target," the head of the IMF's
monetary and capital markets department, Tobias Adrian, and his
two deputies wrote in a blog post.
"Loosening prematurely could risk a sharp resurgence in
inflation once activity rebounds, leaving countries susceptible
to further shocks which could de-anchor inflation expectations,"
they added.
If that plays out, markets may still justify pricing the end
of tightening. When they begin easing again may be a harder
call.
The opinions expressed here are those of the author, a
columnist for Reuters.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The race to raise rates The race to raise rates Fed rate cuts: not so fast? BoE's fight against inflation ECB hikes again and signals more to come Developed markets interest rates Is the selloff in tech stocks over? ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(by Mike Dolan, Twitter: @reutersMikeD; Editing by Paul Simao)
Messaging: mike.dolan.reuters.com@thomsonreuters.net))