Post financial crisis we have seldom seen volatility of the extent that we have experienced recently. Certainly, at least not on such a widespread level that has regularly been characterised by simultaneous write-downs in normally negatively correlated assets. Financial headlines last week at least attested to some concrete actions to justify such violent moves in markets.
Trading last week still punished high risk assets as a continued risk-off tone in markets undermined demand and risk appetite in numerous sectors. However, what emerged at least from the perspective of volatility and disturbance in markets was one of the best case and smoothest scenarios possible.
In recent trading sessions, central banks controlling the three major western economies: the Federal Reserve, the European Central Bank and the Bank of England have all changed the backdrop of their economies considerably. The relative calm in markets from a price perspective was largely due to the strong signposting from the central banks to markets allowing participants to position accurately for the announcements.
The Federal Reserve opted for a vanilla interest rate hike but of a magnitude not seen for many decades with a 75 basis-point hike. The ECB provided nothing in its initial announcement but in an emergency meeting tasked the Council to create a brand new mechanism to ease financing conditions in the bloc. The Bank of England also pursued a fifth consecutive interest rate hike.
Despite immense central bank intervention, there may still be a problem: whilst markets listened to the central banks and positioned accordingly, the public is either not listening or not believing what they’re saying. We can see that because the public’s inflation expectations are outstripping the banks’ and professionals’ forecasts. During the era of ultra-accommodative policy, consumer apathy to central banks didn’t matter, now the story is very different. Inflation expectations can be a central bank’s best friend or worst nightmare and the way the public responds to hopefully moderating prices will be key to how each authority can manage the risks within its economy.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Morning Brief – Eurozone
Humphrey Percy
Fri 1 Dec 2023
Eurozone That was a surprise: yesterday the EU announced that inflation had fallen to 2.4% which was considerably better than the 2.7% that markets had expected. Despite the ECB saying it was far too early to cut rates, the market has pencilled in the first cut for April. Before getting carried away it should be […]
Morning Brief – Data Day
Charles Porter
Thu 30 Nov 2023
Data Day Despite salient data already having been published in China and France so far this morning, we are far from finished with the deluge of data due to reach the market today. The most important of which will be those that we have signposted in earlier briefings: Eurozone and US inflation figures. Given just […]
Morning Brief – UK Labour market
Humphrey Percy
Wed 29 Nov 2023
UK Labour market The Bank of England yesterday broke cover to drive the message home that due to the UK’s labour market remaining tight, it was premature to start talking interest rate cuts and it was not just Governor Bailey who was calling for higher for longer interest rates but also his MEPC colleague Jonathan […]
